Suppose that the decline in house prices accelerates and banks continue to be reluctant lenders, causing consumption and investment to fall sharply. What would you expect to happen to the inflation rate? How would you expect the FOMC to respond in the coming months?
✅ Answers
Answerer 1
Falling consumption and investment means falling demand. As demand falls the interest rate will fall. The FOMC will lower the discount rate to try and lower interest rates in order to boost demand.