Suppose the Bank of Canada decreases the money supply.In response, households and firms will ________ short term assets and this will drive ________ interest rates.

Question

Quizplus · Accepted Answer

When the Bank of Canada decreases the money supply, households and firms will sell short term assets to increase their cash holdings as the money supply is reduced. This will increase the demand for money and decrease the supply of money in the market. As a result, interest rates will go up.

Suppose the Bank of Canada Decreases the Money Supply