If the Bank of Canada reduces the money supply by 5 percent,then the real interest rate will:

Question

Quizplus · Accepted Answer

In the short run, reducing the money supply by 5 percent will increase the real interest rate. This is because there is less money available for lending, making it more expensive to borrow. However, in the long run, the real interest rate will return to its original equilibrium level because households and firms will adjust their spending and investment plans to the new lower level of the money supply.

If the Bank of Canada Reduces the Money Supply by 5