For example since the August job report came out, which showed hundreds of thousands ob jobs created. This will inevitable lead to the Fed to increase interest rates, but what is the motive behind doing this?

Would this not simply lead to a decreased shift in consumption and be an attempt at stagnating the economy?


When people find jobs, they start receiving salaries and their consumption increases. Increased demand for goods and services leads to increase in prices, or inflation. Fed is expected to respond with a rate hike to keep inflation in check.

  • 2
    $\begingroup$ When people find jobs, it means that more output is produced. Since more output is available, why should increased demand lead to higher prices? (It still may, in a real-world economy, but I just wanted to point out that perhaps your answer should be more elaborate). $\endgroup$ – Alecos Papadopoulos Dec 13 '15 at 12:36
  • $\begingroup$ But would that simply not mean we are immediately back to square as one of the main measures of economic stimulation is consumer spending? $\endgroup$ – Sharline Sivanathan Dec 13 '15 at 16:23
  • $\begingroup$ In addition, as aggregate demand increases, investment increases and hence money demand increases. The government adopts a contractionary monetary policy. $\endgroup$ – london Dec 13 '15 at 20:55

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