Suppose the Federal Reserve raises interest rates. Which of the following predicts the most likely results? The money supply wil
l decrease, meaning that banks will give fewer loans and prices for goods and services will fall. The money supply will decrease, meaning that more people will buy goods and services and prices will rise. The money supply will increase, meaning that banks will give more loans and more businesses can open and hire workers. The money supply will increase, meaning that prices will rise and businesses will not hire many workers.
The answer is money will decrease, meaning that banks will give fewer loans and prices for goods and services will fall.
This is because h<span>igher interest rates means that it is more expensive to borrow money and therefore fewer people and businesses will request loans. This tends to put downward pressure on demand for goods and services which in turn tends to put a downward pressure on prices.
The correct answer should be money will rapidly descend, which means that the banks all over will lend out fewer loans. Most of all the prices of goods will decrease as well!.
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