Question

Why would the federal reserve increase interest rates?

a. to boost the economy out of a recession

b. to increase lending by banks

c. to mitigate a rapid expansion of the economy

d. to increase inflation

Answer 1

The Federal Reserve may increase interest rates to mitigate a rapid expansion of the economy, increase inflation, and control the money supply.

Step-by-step explanation:

The Federal Reserve may increase interest rates for several reasons, including:

1. To mitigate a rapid expansion of the economy: When the economy is growing too quickly, it can lead to unsustainable levels of inflation. By increasing interest rates, the Federal Reserve aims to slow down borrowing and spending, which can help prevent excessive inflation.
2. To increase inflation: In some cases, the Federal Reserve may raise interest rates to encourage inflation. This can be done to stimulate the economy and prevent deflation, which can be detrimental to economic growth.
3. To control the money supply: Interest rate adjustments are also a tool used by the Federal Reserve to regulate the money supply. By increasing interest rates, they can reduce the amount of money available for borrowing, which can help manage inflation and stabilize the economy.