Question

One news wire article in the text has the title "fed cuts key interest rate half-point to 1 percent." assuming the economy is in the upward sloping portion of the eclectic aggregate supply curve, what should happen to the price level and output as a result of the fed's action, ceteris paribus? the equilibrium price level and equilibrium output should both increase. the equilibrium price level should increase and equilibrium output should decrease. the equilibrium price level should decrease and equilibrium output should increase. the equilibrium price level and equilibrium output should both decrease.

Answer 1

The equilibrium price level and the equilibrium output should both increase. This is due to the supply curve's upward sloping nature and the reduced interest rate's propensity to increase demand for goods and services. Since less money will be used for paying interest on loans disposable income will be available for other consumption choices.