These 2 questions are related. Generally speaking, if the Federal Reserve wants

Question

These 2 questions are related.

Generally speaking, if the Federal Reserve wants to decrease the money supply, as part of a change in monetary policy, it will:
a.   Lower interest rates
b.   Print counterfeit bills
c.   Raise capital gains taxes
d.   Raise interest rates

If the Federal Reserve changes interest rates to decrease the money supply, what would be the expected effect on the price of real estate in the coming years:
a.   Prices would not change.
b.   Prices would probably increase
c.   Prices would probably decrease
d.   None of the above

Explanation / Answer

d. Raise interest rates

b. Price would probably increase (note)

Note: While rising interest rates can reduce the value of future cash-flows, interest rate can in turn increase the value of physical property due to the fact that real estate is a hard asset.

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