Question

If there is a political business cycle and the Federal Reserve supports the incumbent, then we should expect that prior to elections Fed woulda. raise interest rates to shift aggregate demand left. b. raise interest rates to shift aggregate demand right. c. reduce interest rates to shift aggregate demand left. d. reduce interest rates to shift aggregate demand right.

Answer 1

Answer:

d. reduce interest rates to shift aggregate demand right.

Explanation:

If the Federal Reserve supports the incumbent, they would want that she wins the election. In order to do so they may want to stimulate the economy.

To do so, they may reduce interest rates. This increases the opportunity cost of saving, and thus people instead of saving, will take their money out and spend it. Which in turns shifts the aggregate demand curve to the right.