Question

You hear that the Federal Reserve is raising interest rates. From this new information, you conclude that:a. short-run output will fall along the IS curve, possibly pushing the economy toward recession b. short-run output will rise along the IS curve, possibly pushing the economy toward expansion. c. short-run output will fall as the IS curve shifts left, possibly pushing the economy toward recession d. the federal government will lower taxes. e. there will be no change in short-run output.

Answer 1

Answer:

a. short-run output will fall along the IS curve, possibly pushing the economy toward recession

Explanation:

The Federal Reserve System (the 'Fed) was created by the Federal Reserve Act, passed by Congress in 1913. The Fed began operations in 1914. It was founded by President Woodrow Wilson under the Federal Reserve Act, which was aimed at backing each banks in order to put a definitive end to the bank panics of the 1800s.

Like all central banks, the Federal Reserve is a government agency that is saddled with the following responsibilities;

- Controlling the issuance of currency in United States of America (it promotes public goals such as economic growth, low inflation, and the smooth operation of financial markets).

- Providing banking services to all the commercial banks in the country (the Federal Reserve is the "lender of last resort).

- Regulating banking activities (it has the power to supervise and regulate banks).

In this scenario, you hear that the Federal Reserve is raising interest rates. Thus, from this new information, you conclude that, short-run output will fall along the Investment-Savings (IS) curve, possibly pushing the economy toward recession.