An increase in the interest rate will cause
A)a reduction in the supply of central bank money.
B)a reduction in the demand for currency.
C)a reduction in the demand for reserves.
D)all of the above
E) both B and C

Question

Quizplus · Accepted Answer

An increase in the interest rate will lead to a decrease in the demand for reserves as banks will find it less attractive to borrow money from the central bank at a higher interest rate. Additionally, an increase in interest rates will lead to a reduction in the demand for currency as holding cash will become relatively more expensive compared to holding interest-bearing assets. However, an increase in interest rates will not directly affect the supply of central bank money.

An Increase in the Interest Rate Will Cause