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.
I think you are right.
To determine the correct answer, let's break down the options and understand the relationship between interest rates, money supply, loans, prices, and employment.
When the Federal Reserve increases interest rates, it affects the money supply, as it becomes more expensive to borrow money. Here's the breakdown of each option:
A. The money supply will decrease, meaning that banks will give fewer loans and prices for goods and services will fall.
This option suggests that decreasing the money supply will lead to fewer loans and falling prices for goods and services. This may be the opposite of what typically happens when interest rates rise. Therefore, this option seems unlikely.
B. The money supply will decrease, meaning that more people will buy goods and services, and prices will rise.
Decreasing the money supply does not typically result in more people buying goods and services. When the money supply decreases, it becomes more difficult for people to access credit, limiting their ability to buy. Additionally, prices generally do not rise in response to a decrease in the money supply. Hence, this option is not the most likely outcome.
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 increasing the money supply will result in more loans and businesses opening, leading to increased employment. This aligns with the conventional rationale that lowering interest rates or increasing the money supply can stimulate borrowing and economic activity. Thus, option C seems to be the most likely outcome.
D. The money supply will increase, meaning that prices will rise, and businesses will not hire many workers.
While increasing the money supply may lead to price inflation, the claim that businesses will refrain from hiring many workers does not have a direct correlation or causation. Businesses' hiring decisions are influenced by multiple factors, such as market conditions and demand for their products or services. Thus, this option is less likely to be the correct answer.
Based on the analysis provided, option C is the most likely outcome when the Federal Reserve raises interest rates.