What impact does the Fed\'s raising the interest rate have on the money supply a

Question

What impact does the Fed's raising the interest rate have on the money supply and on 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 reates 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, wich will lower prices.

Explanation / Answer

Option (b).

Rise in interest rates have no impact on money supply. Higher interest rates will lower the demand for money, which eventually lowers aggregate demand, causing reduced growth in price level (lower inflation).

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