Chapter 31, Problem 2MCQ

To determine

The correct action for decreasing the equilibrium interest rate.

Explanation of Solution

In a market economy, market forces of demand and supply regulate all prices. Some people require more cash now than their available reserves will allow. For example, the majority of people do not have $300,000 hanging around to purchase a home. These people go into the credit market and borrow from those who have more present money than they need in order to obtain additional present money. These things are referred to as savers. The cost of borrowing money is based on interest rates.

Depending on the Federal Reserve's and commercial banks' actions, the money supply in the US varies. Interest rates and the amount of money in circulation are inversely related. A bigger money supply results in reduced market interest rates, which reduces the cost of borrowing for consumers.

Thus, from the above we can conclude that the correct option is A.