Question

If the next chair of the Federal Reserve Board has a reputation for advocating an even slower rate of money growth than the current​ chair, what will happen to interest​ rates? A. Slower money growth will lead to a liquidity​ effect, which will lower interest rates.​ Moreover, the lower​ income, price​ level, and inflation will reinforce the decrease in interest rates. B. Slower money growth will lead to a liquidity​ effect, which will raise interest​ rates; however, the lower​ income, price​ level, and inflation will tend to lower interest rates. C. Slower money growth will lead to a liquidity​ effect, which will lower interest​ rates; however, the lower​ income, price​ level, and inflation will tend to raise interest rates. D. Slower money growth will lead to a liquidity​ effect, which will raise interest rates.​ Moreover, the lower​ income, price​ level, and inflation will reinforce the increase in interest rates.

Answer 1

Answer: B. Slower money growth will lead to a liquidity​ effect, which will raise interest​ rates; however, the lower​ income, price​ level, and inflation will tend to lower interest rates.

Step-by-step explanation:

Slower money growth would mean there is less money in the economy which means that there is less liquidity. This will increase interest rates because there would be less money available to loan out to people and so the ones that will be available have to be done at high rates.

As a result of the lower money supply though, people would have lower incomes and demand less goods which would reduce the price level. These will have the effect of reducing the rates to enable people get loans.