Suppose the Federal Reserve raises interest rates. Which of the following predicts the most likely results?
A. The money supply will decrease, meaning that banks will give fewer loans and prices for goods and services will fall.
B. The money supply will decrease, meaning that more people will buy goods and services and prices will rise.
C. The money supply will increase, meaning that banks will give more loans and more businesses can open and hire workers.
D. The money supply will increase, meaning that prices will rise and businesses will not hire many workers
I think that the answer is D.
To determine the correct answer to this question, let's break it down:
The Federal Reserve raising interest rates typically has an impact on the money supply, borrowing costs, and spending in the economy. The goal of raising interest rates is generally to slow down economic growth and keep inflation in check.
Now, let's evaluate the options:
A. The money supply will decrease, meaning that banks will give fewer loans and prices for goods and services will fall.
If the money supply decreases, it would make it more expensive for banks to borrow money, resulting in fewer loans. Additionally, with reduced spending power, prices could potentially decrease.
B. The money supply will decrease, meaning that more people will buy goods and services and prices will rise.
This option presents a contradiction by suggesting that a decrease in the money supply would result in more people buying goods and services. Furthermore, it states that prices would rise, which contradicts the usual relationship between money supply and prices.
C. The money supply will increase, meaning that banks will give more loans and more businesses can open and hire workers.
This option suggests that an increase in the money supply would lead to more loans being given by banks, which would result in businesses having more capital to expand and hire workers. This scenario aligns with the typical economic theory regarding the impact of increased money supply.
D. The money supply will increase, meaning that prices will rise and businesses will not hire many workers.
This option suggests that an increase in money supply would lead to price inflation, but businesses would not hire many workers. It is important to note that an increase in money supply, when managed appropriately, does not necessarily result in businesses avoiding hiring workers.
Based on the explanations provided, it is clear that option C is the most accurate prediction. An increase in the money supply would generally lead to more loans being given by banks, which could result in more businesses opening and hiring workers.