Lower rates of inflation increase planned spending because:
A)the Fed reacts to the lower inflation by lowering interest rates.
B)the reduction in wealth, resulting from the reduced real value of money, restrains spending.
C)resources are redistributed from high-spending households to low-spending households.
D)the prices of domestic goods sold abroad increase (with a constant exchange rate).

Question

Quizplus · Accepted Answer

When the inflation rate decreases, the Fed responds by lowering the real interest rate per its reaction function, which increases consumption and investment spending. This is one of reasons for the downward slope of the AD curve.

Lower Rates of Inflation Increase Planned Spending Because