A reduction in the money supply is likely to ?
Correct answer: B. Increase the interest rate
- A. Reduce the interest rate
- B. Increase the interest rate
- C. Increase inflation
- D. Decrease deflation
Explanation
With a reduced money supply, liquidity becomes scarcer relative to demand, so the equilibrium interest rate tends to rise. Higher interest rates are the usual monetary-market response to contractionary money supply policy.
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