Suppose the Reserve Bank raises the cash rate.In the months that follow,the quantity of money and the supply of loanable funds ________,and the long-term real interest rate ________.

Question

Quizplus · Accepted Answer

When the Reserve Bank raises the cash rate, it makes borrowing more expensive for commercial banks. Consequently, banks may lend out less money which means that the quantity of money and the supply of loanable funds may decrease. This decreased supply of loanable funds would lead to an increase in the long-term real interest rate. Therefore, the correct answer is  C) decrease; rises.

Suppose the Reserve Bank Raises the Cash Rate