Question

if the output gap is negative, then relative to the neutral interest rate, the federal reserve will the real interest rate to drive consumption and investment. group of answer choices raise; down raise; up lower; down lower; up

Answer 1

When facing a negative output gap, the Federal Reserve would typically lower the real interest rate to boost consumption and investment, aiming to shift aggregate demand right and raise GDP.

Step-by-step explanation:

If the output gap is negative, indicating that the economy is producing below its potential, the Federal Reserve is likely to carry out an expansionary monetary policy. This involves lowering the real interest rate to stimulate borrowing, consumption, and investment. In response to a negative output gap, the Fed may buy bonds, which increases the money supply and lowers interest rates. As lower interest rates make borrowing cheaper, businesses and consumers are more inclined to take loans for investment and major purchases, thus driving consumption and investment up. This policy aims to shift aggregate demand to the right, thereby increasing GDP and decreasing the negative output gap.