Question

Based on the information presented in the video, which is likely to occur as a result of the Fed decreasing the money supply? Choose three correct answers.
Responses

The unemployment rate may rise.
The unemployment rate may rise.

Consumers will spend less money, causing an economic slowdown.
Consumers will spend less money, causing an economic slowdown.

Employers will bring on large numbers of new employees.
Employers will bring on large numbers of new employees.

Prices for durable goods will increase dramatically.
Prices for durable goods will increase dramatically.

The inflation rate will stop growing or decrease.

Answer 1

Correct choices (three):

- The unemployment rate may rise. — Contractionary policy raises borrowing costs and reduces demand, which can lead firms to cut back and lay off workers.
- Consumers will spend less money, causing an economic slowdown. — A smaller money supply tends to raise interest rates and reduce consumer and business spending, slowing economic activity.
- The inflation rate will stop growing or decrease. — Reducing the money supply reduces aggregate demand and inflationary pressure, so inflation is likely to fall or stop rising.

The other two options are unlikely: employers bringing on many new employees and durable-goods prices increasing dramatically are inconsistent with a tighter money supply.