If the monetary growth rate is far above the target range previously announced by the Fed, financial investors are likely to assume that future interest rates will increase since

Question

Quizplus · Accepted Answer

If the monetary growth rate is far above the target range previously announced by the Fed, it implies that there is an excessive supply of money in the economy which can lead to inflation. In order to curb inflation, the Fed is likely to reduce the money supply. This reduction in money supply can lead to an increase in interest rates since it becomes relatively expensive to borrow money. Additionally, when inflation starts to increase, lenders increase their interest rates to compensate for the loss in purchasing power due to inflation. Finally, borrowing may increase as investors anticipate higher inflation, which can further fuel inflationary pressures. Therefore, all of these options are possible.

If the Monetary Growth Rate Is Far Above the Target