Explanation:
Central banks typically raise interest rates when both inflation and economic activity are too high. This is a contractionary monetary policy aimed at cooling down an overheating economy and controlling inflation. Option A would typically call for lowering interest rates to stimulate the economy. Option C presents a mixed scenario where the central bank would need to balance competing objectives, but high inflation would likely be the dominant concern.
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In which of the following situations would a central bank most likely raise interest rates?
A
When both inflation and economic activity are too low
B
When both inflation and economic activity are too high
C
When inflation is too low and economic activity is too high
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