If the Fed increases the money supply and as a result,households and firms buy more short-term financial assets,the prices of those short-term financial assets will ________ and the interest rates on those assets will ________.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall

Question

Quizplus · Accepted Answer

If the Fed increases the money supply, households and firms will have more money to purchase short-term financial assets. As the demand for these assets increases, their prices will rise. However, the increase in the money supply will also decrease the interest rates on these assets as there is more money available to lend at lower rates. Therefore, the prices of short-term financial assets will rise and the interest rates on those assets will fall.

If the Fed Increases the Money Supply and as a Result,households