Question

Assume that the Federal Reserve just announced that it intends to increase money supply growth. Thus, interest rates will definitely:

Why is the correct answer "increase or decrease" instead of just "decrease"?

Please explain with details AND NO, THE ANSWER IS NOT DECREASE, IT'S "INCREASE OR DECREASE".

Answer 1

Fed or federal Reserve System is the central bank of United States and controls the supply of money in the economy. Its policies affect economies around the world and thus it is the most important central bank in the world.

When fed wants to increase the supply of money in the economy, Interest rates can increase or decrease because of the following,

1.) It can increase rates and make borrowing and spending more lucrative and boost the overall economic activity by giving more purchasing power to people to spend more. This effectively increases the supply of money in the economy and most trodden path chosen by central banks whenever they need to increase money supply i the economy.

2.) It can conversely Increase Interest rates and still increase money supply in the economy as when the interest rates are high, inflation is kept under control which also in turn can increase purchasing power when products and services prices are constant while purchasing power increases as they do over a period of time. This is still used sparingly and only used when lowering rates are destined to spiral Inflation rates beyond control and yet economy needs a boost.