Question 56

AD shifts right

A decrease in the federal funds target rate typically leads to lower interest rates, which encourages borrowing and spending. This increase in consumer and business expenditure results in a rightward shift of the Aggregate Demand (AD) curve in the short run.

A) SR Phillips shifts right

The Short-Run Phillips Curve represents the trade-off between inflation and unemployment. A decrease in the federal funds target does not directly result in a rightward shift of the SR Phillips Curve; rather, it influences economic activity and demand, which may affect inflation and unemployment but does not shift the curve itself.

B) AD shifts right

This option correctly identifies the immediate effect of a decrease in the federal funds target rate. Lower interest rates stimulate economic activity by increasing consumption and investment, leading to a rightward shift in the Aggregate Demand curve in the short run.

C) nominal rate ↑

This option is incomplete and does not provide a clear statement regarding nominal interest rates. While a decrease in the federal funds rate typically lowers nominal interest rates, this does not directly address the immediate effects on Aggregate Demand.

D) dollar appreciates

A decrease in the federal funds target rate generally leads to lower interest rates, which can lead to a depreciation of the dollar as investors seek higher returns elsewhere. Therefore, this option is incorrect as it contradicts the expected impact on the currency value.

Conclusion

The correct answer, B, accurately reflects the impact of a decrease in the federal funds target rate by indicating a rightward shift in Aggregate Demand due to increased economic activity. Other options either misinterpret the relationship between interest rates and economic indicators or provide incomplete statements, making them incorrect in this context.