Assume that the demand for money depends on the interest rate. A decrease in the money supply will cause
A) the interest rate to increase, the quantity demanded of money to decrease, and the velocity of money to decrease.
B) the interest rate to increase, the quantity demanded of money to decrease, and the velocity of money to increase.
C) the interest rate to decrease, the quantity demanded of money to decrease, and the velocity of money to increase.
D) the interest rate to decrease, the quantity demanded of money to increase, and the velocity of money to decrease.

Question

Quizplus · Accepted Answer

A decrease in the money supply typically leads to an increase in interest rates because there is less money available for borrowing. This increase in interest rates reduces the quantity of money demanded. Additionally, with less money in circulation, each unit of currency must be used more frequently to support the same level of transactions, leading to an increase in the velocity of money.

Assume That the Demand for Money Depends on the Interest