If the Federal Reserve decreased the money supply, the effects would include:
1. Increased interest rates: When the money supply decreases, there is less money available for borrowing. This scarcity of money leads to increased demand for loans, causing interest rates to rise as lenders can charge more for the limited funds available.
2. Decreased borrowing: With higher interest rates, borrowing becomes more expensive. Individuals and businesses may choose to borrow less due to the increased cost of borrowing money, which can slow down economic activity.
3. Decreased investing: Higher interest rates can also impact investment decisions. When borrowing becomes more costly, businesses may be less inclined to invest in new projects or expansion, leading to a decrease in overall investment in the economy.
In summary, decreasing the money supply by the Federal Reserve can lead to increased interest rates, decreased borrowing, and reduced investing in the economy.
