Question

When current real output exceeds potential real output, the fed will _____ interest rates in an effort to fight _____?

Answer 1

The correct words for the blank spaces are: increase; inflation.

Step-by-step explanation:

The United States Federal Reserve (Fed) is the entity in charge of controlling the nation's economic inflation. In the case the country's output is greater than the potential real output, typically the Fed tends to raise the interest rates to avoid the inflation rate to keep growing. Under this scenario, prices in the markets remain stable as well as the level of employment.

Answer 2

When current real output exceeds potential real output, the fed will increase interest rates in an effort to fight inflation.

Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. Central banks attempt to limit inflation, and avoid deflation, in order to keep the economy running smoothly.