Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Increased economic activity leads to higher demand for goods and services.
B
Higher demand results in increased price levels and inflationary expectations.
C
Inflationary expectations cause firms to raise prices and wages.
D
As a result, the real interest rate experiences changes, reflecting these dynamics.
Understanding the Answer
Let's break down why this is correct
Answer
During an economic recovery, businesses start to grow again, leading to increased demand for loans to invest in new projects. As more people and companies seek loans, the demand for money rises, which can push real interest rates higher. When interest rates go up, it affects how much people are willing to spend and invest, potentially slowing down inflation. For example, if a bakery wants to expand, it might take a loan, but if interest rates are high, it might decide to wait, which can help keep prices stable. Overall, as recovery happens, the balance between interest rates and inflation expectations shifts, influencing how the economy behaves.
Detailed Explanation
When the economy gets better, people buy more things. Other options are incorrect because This step happens after demand increases; Firms raise prices and wages after they expect inflation.
Key Concepts
Economic Recovery
Real Interest Rates
Inflationary Expectations
Topic
Economic Recovery and Supply Shifts
Difficulty
easy level question
Cognitive Level
understand
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