What happens to GDP if the Fed is too responsive to changes in aggregate demand?
A) Volatility increases.
B) Volatility decreases.
C) GDP is difficult to influence in the short-run and the long-run.
D) It ends up being lower in all cases.

Question

Quizplus · Accepted Answer

If the Fed is too responsive to changes in aggregate demand, it may lead to a situation where GDP becomes more volatile. This can happen if the Fed tries to stimulate the economy too much during a boom or tries to slow down the economy too much during a recession. Such actions can lead to excessive swings in economic activity and can make it more difficult for businesses and households to plan for the future.

What Happens to GDP If the Fed Is Too Responsive