What impact does the Fed's raising the interest rate have on the money supply and on the price level?
A) An increase in interest rates raises the money supply and eventually reduces prices.
B) An increase in interest rates reduces the money demand which will slow the growth in prices.
C) An increase in interest rates lowers the money supply and raises the money demand, which will neutralize price increases.
D) An increase in interest rates will increase investment spending and GDP, which will lower prices.

Question

Quizplus · Accepted Answer

When the Fed raises interest rates, it makes borrowing more expensive, which reduces the demand for money and slows the growth of prices. This is because higher interest rates make it less attractive to borrow, which reduces the amount of money that is circulating in the economy. Over time, this can help to reduce inflationary pressure and keep prices stable. Therefore, an increase in interest rates reduces the money demand which will slow the growth in prices.

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