Question

Classify each of the following in terms of their effect on interest rates (increase or decrease):_____

(I) Covenants on borrowing become more restrictive
(II) The Federal Reserve increases the money supply
(III) Total household wealth increases

Answer 1

(I) Covenants on borrowing become more restrictive

This will decrease the demand for money as companies will have to bear more covenants which will restrict their business plans and because of this the demand curve of money will shift to the left which will decrease the interest rates

(II) The Federal Reserve increases the money supply

Increases in the money supply will shift the supply curve of money to the left which will in turn decrease the interest rates.

(III) Total household wealth increases

This will also shift the supply curve to the left as people will have more idol money that they would want to lend and earn an interest on, so this will also decrease the interest rates.

Step-by-step explanation: