When money demand increases,the Bank of Canada cannot keep the money supply from rising and the interest rate from rising at the same time.

Question

Quizplus · Accepted Answer

When money demand increases, people will demand more money at any given interest rate, which causes an excess demand for money. To restore equilibrium, the Bank of Canada will need to increase the money supply, which will put upward pressure on interest rates. Therefore, it is not possible for the Bank of Canada to keep the money supply from rising and the interest rate from rising at the same time when there is an increase in money demand.

When Money Demand Increases,the Bank of Canada Cannot Keep the Money