Question

The Federal Reserve has recently decided to increase interest rates to help reduce future inflation. t/f

Answer 1

True

Explanation : Inflation refers to the rate at which prices for goods and services rise. In the U.S, the interest rate(which is the amount charged by a lender to a borrower) is based on the federal funds rate that is determined by the Federal Reserve . The Federal Reserve system is the central bank of the U.S. The Fed attempts to influence the rate of inflation by setting and adjusting the target for the federal funds rate. This tool enables the Fed to expand or contract the money supply as needed, which influences target employment rates, stable prices, and stable economic growth. In general, when interest rates are low, the economy grows and inflation increases. When interest rates are high, the economy slows and inflation decreases. The interest rate determines the price of holding or loaning money. Banks pay an interest rate on savings in order to attract depositors. Banks also receive an interest rate foroney that is loaned from their deposits. When interest rates are low, individuals and businesses tend to demand more loans. Each bank loan increases the money supply in a fractional reserve banking system . As money supply increases, inflation rises. Thus low interest rates tend to result in more inflation and when there is higher interest rates demand for loan decreases, hence money supply decreases and the result is lower inflation. The Fed will raise interest rates to reduce inflation and decrease rates to spur economic growth.