Principles of Investment Practice Exam 2026 – Complete Study Resource

A decrease in the money supply by the Federal Reserve typically leads to increased interest rates. When the Federal Reserve reduces the amount of money circulating in the economy, borrowing becomes more expensive because lenders charge higher rates due to the scarcity of money. As a result, interest rates rise, which influences borrowing costs for consumers and businesses. Higher interest rates can dampen consumer spending and investment, as loans for homes, cars, and business expansion become less attractive. This relationship between the money supply and interest rates is a fundamental aspect of monetary policy and illustrates how central banks can influence economic activity through their control of the money supply.