Future Business Leaders of America (FBLA) Securities and Investments Practice Test

What is typically the result of tightening monetary policy?

1. Lower inflation rates

2. Increased credit availability

3. Higher interest rates

4. Increased consumer spending

The correct answer is: Higher interest rates

Tightening monetary policy generally leads to higher interest rates as central banks aim to control inflation and stabilize the economy. When a central bank implements this policy, it may raise the benchmark interest rate or reduce the money supply available in the banking system. The intent behind higher interest rates is to make borrowing more expensive, which typically curtails consumer and business spending. By increasing interest rates, central banks can deter excessive borrowing and spending that might drive up inflation. As a result, this approach helps stabilize prices and prevent an overheated economy. Higher interest rates can also attract foreign investment, leading to a possible appreciation of the national currency. Thus, the direct outcome of tightening monetary policy is indeed higher interest rates.