What Impact Does the Fed's Raising the Interest Rate Have

question 83

Multiple Choice

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

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Definitions:

Negative Externality

A negative externality exists when a product or decision results in a negative effect on a third party not directly involved in the transaction.

Positive Externality

A benefit that affects someone who did not choose to incur that benefit, often associated with public goods or services.

Profit-Maximizing

The process or strategy employed by businesses to determine the price and output level that delivers the maximum possible profit.

Externality

A side effect or consequence of an industrial or commercial activity that affects other parties without this being reflected in the cost of the goods or services involved.