Question

If the Federal Reserve tightens the money supply, other things held constant, short-term interest rates will be pushed upward, and this increase will generally be greater than the increase in rates in the long-term market.

a) True
b) False

Answer 1

The statement is true

Step-by-step explanation:

Tightening monetary policy or curbing money supply in an economy is a move by Federal Reserve to control inflation or bring down over-heated economic growth.

Money supply is curbed by increasing short-term interest rates, thereby increasing cost of borrowing and making borrowing less attractive to public. This increase in short-term rates, also called Federal fund rates are usually greater than long-term interest rates prevailing in the market.