Decreases in the money supply cause higher interest rates, lower bond prices and a negative demand shock.

Name: Decreases in the money supply cause higher interest rates, lower bond prices and a negative demand shock.
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Question

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When the money supply decreases, there is less money available for borrowing, which causes interest rates to rise. Higher interest rates lead to lower demand for loans and investments, which decreases bond prices. Therefore, a decrease in the money supply causes a negative demand shock.

Decreases in the Money Supply Cause Higher Interest Rates, Lower