When the central bank tightens the money supply:
A) the inflation rate immediately falls.
B) nominal interest rates fall in the short run.
C) nominal interest rates fall in the long run.
D) real balances rise in the short run.

Question

Quizplus · Accepted Answer

When the central bank tightens the money supply, nominal interest rates typically rise in the short run due to reduced liquidity. However, in the long run, as inflation expectations adjust downward, nominal interest rates may fall.

When the Central Bank Tightens the Money Supply