What impact would the Fed's raising the interest rate have on any inflationary pressure in the economy?
A) An increase in interest rates decreases the money demand, which could slow increases in the price level.
B) An increase in interest rates increases the money supply, which could cause the price level to increase.
C) An increase in interest rates decreases the exchange rate, which causes net exports to rise, generating inflation.
D) An increase in interest rates increases real GDP, which creates inflation in an economy.

Question

Quizplus · Accepted Answer

When the Fed raises interest rates, it becomes more expensive to borrow money, which decreases the demand for money. This decrease in demand for money can slow down inflationary pressures in the economy. Additionally, higher interest rates can also encourage saving instead of spending, which can further address inflationary pressure.

What Impact Would the Fed's Raising the Interest Rate Have