Which of the following is most likely to occur if there is a decrease in the supply of money?
A) The demand for money will increase.
B) Planned investment spending will increase.
C) Interest rates will rise.
D) The demand for money will decrease.

Question

Which of the following is most likely to occur if there is a decrease in the supply of money?  
A) The demand for money will increase. 
B) Planned investment spending will increase. 
C) Interest rates will rise. 
D) The demand for money will decrease.

Quizplus · Accepted Answer

A decrease in the supply of money will lead to an increase in interest rates. This is because with less money available, lenders can charge higher interest rates to borrowers who are competing for a limited amount of funds. The increase in interest rates will then make it more expensive for borrowers to take out loans, leading to a decrease in demand for money. Option A is incorrect because a decrease in the supply of money would not increase the demand for money. Option B is incorrect because a decrease in the supply of money would actually make it harder or more expensive for firms to borrow, potentially reducing their planned investment spending. Option D is incorrect for the reasons stated above, i.e. a decrease in the supply of money would lead to an increase in interest rates, reducing demand for money.

Which of the Following Is Most Likely to Occur If