Question

Personal Finance and Economics S4 Patterson
Monetary Policy: The Federal Reserve
The Fed and Changing Interest Rates
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? Choose three correct answers.
Responses

discourage consumer borrowing by increasing interest rates on loans
discourage consumer borrowing by increasing interest rates on loans

increase the money supply for banks
increase the money supply for banks

reduce the amount of available credit
reduce the amount of available credit

encourage banks to loan more money
encourage banks to loan more money

decrease the amount of money that banks have to lend

Answer 1

Correct choices:
- discourage consumer borrowing by increasing interest rates on loans
- reduce the amount of available credit
- decrease the amount of money that banks have to lend

Why: Raising the rate the Fed charges makes borrowing more expensive for banks and, ultimately, for consumers and businesses. That discourages new borrowing, reduces available credit in the economy, and leads banks to borrow and lend less. The other options (increasing the money supply or encouraging banks to lend more) describe expansionary outcomes, which are the opposite of what higher Fed rates aim to achieve.