If the Federal Reserve tightens the money supply, other things held constant, short-term interest rates will be pushed upward, and this increase will probably be greater than the increase in rates in the long-term market.

Question

Quizplus · Accepted Answer

When the Federal Reserve tightens the money supply, it becomes costlier for banks to borrow money, leading to an increase in short-term interest rates. However, the long-term market may not be impacted to the same extent due to factors such as inflation expectations and demand for long-term bonds. Therefore, the increase in short-term rates is likely to be greater than the increase in long-term rates.

If the Federal Reserve Tightens the Money Supply, Other Things