Question

Imagine the following: New sources of energy have become marketable and the industries involved have hired thousands to operate the emergence of new businesses. Construction companies cannot build homes fast enough for workers in the energy industry. Due to increasing salaries in several other industries that partner with energy companies, the demand for everything from food to entertainment to travel has increased. High demand has brought about shortages in some product categories. To help manage the situation in the short term, ___________.
a) the Fed will likely decrease interest rates
b) the Fed will likely increase interest rates
c) Congress will likely decrease taxes
d) Congress will likely enact monetary policy

Answer 1

Answer:

b) the Fed will likely increase interest rates

Explanation:

The situation of increased employment and salaried has caused an increase in demand. At the moment, demand outweighs supply. It appears that the economy has too much money in circulation.  Shortly, the rate of inflation will go up, leading to an increase in the prices of goods and services.

The Fed should raise interest rates to counter the expected inflation.  The economy is expanding rapidly, which is not sustainable. An increase in interest rate will reduce the money supply in the economy, thereby averting a potential rise in the cost of living due to a general increase in prices.