Which of the following is a consequence of an increase in the cash rate?

An increase in the cash rate directly influences the economy by making borrowing more expensive and saving more attractive. When the cash rate rises, the cost of loans increases leading to higher interest rates on personal loans and mortgages, typically resulting in reduced consumer spending and investment by businesses.

As borrowing becomes costly, both consumers and businesses are likely to reduce their borrowing and spending, which in turn leads to a decrease in the money supply circulating within the economy. This contraction of the money supply can help manage inflation by reducing purchasing power within the economy, making option C the correct consequence of an increase in the cash rate.

In contrast, the other options do not hold true in this situation. For instance, an increase in the cash rate would generally not lead to a decrease in inflation expectations; instead, it could be aimed at reducing inflation. Similarly, an increase in the cash rate would typically lead to decreased consumer spending rather than an increase. Lastly, higher interest rates usually lead to an increase in government borrowing costs, not a drop. Thus, the dynamics established by an increased cash rate align with a decreased money supply as the correct consequence.