Question

When the Fed decreases the money supply, we expect

a. interest rates to fall and stock prices to rise.
b. interest rates to rise and stock prices to fall.
c. interest rates and stock prices to fall.
d. interest rates and stock prices to rise.

Answer 1

b. interest rates to rise and stock prices to fall.

Step-by-step explanation:

Interest rates are the prices of money (the cost to borrow money for use) so when money is scarce (decreased money supply) rates will rise.

When interest rates rise, people will cut down on spending and investment causing corporate earnings to decrease, causing the price of stocks to decrease.