In the short-run, if the Federal Reserve increases interest rates, then consumption and investment ______, aggregate expenditure ______, and short-run equilibrium output _______. increase; increases; increases increase; increases decreases increase; decreases; decreases decrease; decreases; decreases
In the short-run, if the Federal Reserve increases interest rates, then consumption and investment decrease, aggregate expenditure decreases, and short-run equilibrium output decreases.
Explanation:
If interest rates increases, consumers have more incentives to save (instead of expending) reducing consumption of goods and services, and investment became more expensive (because loans cost are related to interest rates, which are higher, then demand for loans would reduce, reducing investment).
Then, because consumption and investment are elements of aggregate expenditure, aggregate expenditure would decrease (aggregate demand would reduce).
In the short run, this decrease in aggregate demand would reduce short run output. (Less demand becames in less output)
