Question

When The Fed initiates contractionary​ policy, which of the following multiple events will​ occur? A. Real...

When The Fed initiates contractionary​ policy, which of the following multiple events will​ occur?

A. Real interest rates will decrease, bank deposits will increase and the value of bank loans will increase.

B. Real interest rates will increase, stock prices will decrease and the volume of bank loans will decrease.

C. Real interest rates will increase, stock prices will increase and moral hazard will increase

D. Lending activity decreases, stock prices will decrease and the volume of the bank loans will decrease.

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Answer #1

Option B

Real interest rates will increase, stock prices will decrease and the volume of bank loans will decrease

Contractionary policy is used to control inflationary policy in the economy. It reduces the money supply. It decreases the interest rate as the money supply curve shifts to the left. The increase in the interest rate people reduces the consumption and investment spendings and shifts the stock demand curve to left so the stock prices decrease. The decrease in the money supply also decreases reserves and reserves decreases the loan capacity of the banks so the loans decrease.

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