Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Increased supply leads to lower prices, reducing inflation expectations and increasing real interest rates.
B
A rightward shift in supply decreases prices, lowering inflation expectations and potentially lowering real interest rates.
C
Supply shifts have no impact on interest rates but always increase inflation expectations.
D
A leftward shift in supply always leads to higher real interest rates regardless of price levels.
Understanding the Answer
Let's break down why this is correct
Answer
During an economic recovery, shifts in aggregate supply can significantly influence real interest rates and inflation expectations. When aggregate supply increases, it means that businesses are producing more goods and services, which can lead to lower prices. As prices stabilize or even decrease, inflation expectations may also drop, making people believe that prices won't rise quickly in the future. This change can lead to lower real interest rates because lenders might not demand as high a return on their loans if they expect inflation to be low. For example, if a bakery starts making more bread than before, the increased supply might lower bread prices and reduce concerns about inflation, leading to lower interest rates on loans for new businesses.
Detailed Explanation
When supply increases, prices usually go down. Other options are incorrect because This answer suggests that lower prices would raise interest rates; This option claims supply shifts don't affect interest rates.
Key Concepts
Economic Recovery
Aggregate Supply Shifts
Real Interest Rates
Topic
Economic Recovery and Supply Shifts
Difficulty
medium level question
Cognitive Level
understand
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