Question

When the fed increases the money supply, what tends to happen to short-term interest rates?

1) They tend to decline
2) They tend to increase
3) They tend to remain unchanged
4) It depends on other factors

Answer 1

When the Fed increases the money supply, it usually causes short-term interest rates to decline.

Step-by-step explanation:

When the Federal Reserve increases the money supply, it tends to have an effect on short-term interest rates. In general, when the money supply increases, interest rates tend to decline. This is because as more money becomes available in the economy, the demand for borrowing decreases, leading to a decrease in interest rates. However, it is important to note that short-term interest rates can also be influenced by other factors such as the demand for loans and the overall state of the economy.