Question: Many industries benefit in the short run from lower interest rates and an increased supply of credit availability. Nonetheless, we know from bitter experience that the attempt to hold interest rates below equilibrium for an extended period of time is likely to lead to higher inflation and an eventual credit squeeze. Few industries are more affected by credit conditions than the housing industry. As an executive of a company that supplies materials to that industry, indicate how you would adjust your business plans when the FOMC takes the following action.
(A) The inflation rate is 3%, real growth is 4%, and the funds rate rises from 2% to 3%.
(B) Same economic conditions, but the funds rate rises from 3% to 4%.
(C) Same economic conditions, but the funds rate rises from 5% to 6%.
(D) Real GDP has fallen 2% but because of an increase in the inflation rate from 8% to 10%, the funds rate rises from 12% to 14%.
(E) Inflation rate is 2%, real growth is 4%, but because of a stock market slump, the funds rate is reduced from 2% to 1%.