If the Fed increases the money supply, a. the interest rate increases, which tends to raise stock prices. b. the interest rate decreases, which tends to raise stock prices. c. the interest rate decreases, which tends to reduce stock prices. d. the interest rate increases, which tends to reduce stock prices

Question

Business

Barbara Baker

27 August, 20:13

If the Fed increases the money supply, a. the interest rate increases, which tends to raise stock prices. b. the interest rate decreases, which tends to raise stock prices. c. the interest rate decreases, which tends to reduce stock prices. d. the interest rate increases, which tends to reduce stock prices

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Answers (1)

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Lana Mcgrath · Answer 1

The correct answer is letter "B": the interest rate decreases, which tends to raise stock prices.

Explanation:

The U. S. Federal Reserve (Fed) has three main methods to affect money supply: through changes in reserve requirements, discount rates, and market operations. When the Fed decreases the interest rates, banks lend more money from the central bank so that individuals and organizations can have more money available in the form of credit. With more money available, the demand for investments in securities such as stocks tends to increase, which raises their price.