When the Fed lowers the Federal Funds rate:
A) both interest rates and the money supply increase.
B) interest rates decrease but the money supply increases.
C) interest rates increase but the money supply decreases.
D) both interest rates and the money supply decrease.

Question

Quizplus · Accepted Answer

When the Fed lowers the Federal Funds rate, it signals to banks that they can borrow from each other at a lower interest rate, resulting in a decrease in interest rates. This prompts banks to make more loans, thereby increasing the money supply. Therefore, the correct choice is B, as interest rates decrease but the money supply increases.

When the Fed Lowers the Federal Funds Rate