Assume that to cool off the economy and decrease expectations for inflation, the Federal Reserve
tightened the money supply, causing an increase in the risk-free rate, $r_{rf}$. Investors also became
concerned that the Fed's actions would lead to a recession, and that led to an increase in the market
risk premium, $(r_M - r_{rf})$. Under these conditions, with other things held constant, which of the
following statements is most correct?
