If the Fed Reduces the Money Supply to Reduce Inflation

question 253

Multiple Choice

If the Fed reduces the money supply to reduce inflation, a floating exchange rate will aid the Fed in fighting inflation because

• A) as the money supply is decreased, the interest rate will increase, and the price of U.S. exports will fall and the price of U.S. imports will rise.
• B) as the money supply is decreased, the interest rate will increase, and the price of U.S. exports will rise and the price of U.S. imports will fall.
• C) as the money supply is decreased, the interest rate will increase, and the price of both U.S. exports and U.S. imports will rise.
• D) as the money supply is decreased, the interest rate will increase, and the price of U.S. exports and U.S. imports will fall.

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Definitions:

Future Value Factor

A multiplier used to calculate the estimated future value of a current investment or cash flow at a specified rate of return.

Cash Flows

The entire amount of funds transferred into and out of an entity, impacting its liquidity.

Future Value Factor

A multiplier used to calculate the future value of an investment based on its present value and interest rate over time.