When the U.S. central bank, the Fed, decides to decrease the money supply to combat inflation, it:
A Causes the price of US dollar to fall
B Reduces the interest rate
C increases the merchandise trade deficit
D Increases private spending
E Causes capital to flow out of the US

Question

When the U.S. central bank, the Fed, decides to decrease the money supply to combat inflation, it:
A Causes the price of US dollar to fall
B Reduces the interest rate
C increases the merchandise trade deficit 
D Increases private spending 
E Causes capital to flow out of the US

justus · Answer

What are you thinking?

justus · Answer

Central banks use several methods, called monetary policy, to increase or decrease the amount of money in the economy.

Chami · Answer

@justus I put E but I wanted a second opinion.
I know it couldn’t be A or C and I assumed private spending would decrease with less money. Also I didn’t think the interest rate would decrease.