If the Fed decreases the money supply and as a result,households and firms buy fewer 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

When the Fed decreases the money supply, households and firms have less money to spend on short-term financial assets, leading to a decrease in demand for those assets. As a result, the prices of those assets will fall. However, since the prices of short-term financial assets and interest rates are inversely related, the interest rates on those assets will rise. Therefore, the correct answer is C, where prices of short-term financial assets will fall and the interest rates on those assets will rise.

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