Question

Scenario: Over the last several months, there has been a rapid increase in the number of loans that banks have provided for mortgages and small businesses. This change has raised concerns for the Fed. Today, the Fed has announced an increase in the interest rates that it is charging banks. In this scenario, what is the Fed trying to do by increasing interest rates

Answer 1

Decrease the total spending.

Step-by-step explanation:

When the number of loanable funds market is high, interest rates are low, which thereby insentivises spending. Banks will loan out more and thus the economy will be in a short-term expansionary phase. The feds will implement an increase in interest rate via fiscal policies and decrease the overall spending.

This is known as *crowding out*.