In the short run
A) the interest rate can rise when the domestic money supply falls.
B) the interest rate can decrease when the domestic money supply falls.
C) the interest rate stays constant when the domestic money supply falls.
D) the interest rate rises in the same proportion as the domestic money supply falls.
E) the interest rate never rises when the domestic money supply falls.

Question

Quizplus · Accepted Answer

In the short run, the reduction in the domestic money supply will increase the demand for money, causing the interest rate to rise. This is due to the fact that there is now less money available for borrowing, making it more expensive to borrow. Therefore, choice A is the correct answer.

In the Short Run