If participants in securities markets believe that an announced decrease in the money supply will reduce the rate of inflation, the likely result will be
A) higher real interest rates.
B) higher nominal interest rates.
C) lower real interest rates.
D) lower nominal interest rates.

Question

Quizplus · Accepted Answer

If participants expect a decrease in the money supply to reduce inflation, they will anticipate lower future inflation rates, leading to a decrease in nominal interest rates, as nominal rates include the expected inflation component.

If Participants in Securities Markets Believe That an Announced Decrease