🎛️ Simulation · Beginner
The Fed Raises Rates
Inflation is running a bit hot. The Federal Reserve decides to raise its policy interest rate sharply to cool the economy down.
The facts
- The economy starts in a normal, balanced state.
- The Fed raises the federal funds rate from 2.5% to 6.0%.
- Nothing else changes — all else equal.
Your predictions
Playing it out…
Why?
Higher interest rates make borrowing more expensive for households and businesses. Mortgage rates rise almost immediately, home buying and business investment slow, and spending falls. Slower demand pushes GDP growth down and unemployment up, and with less demand pressure, inflation gradually falls. This is the classic trade-off central banks face: fighting inflation usually costs some jobs in the short run.