Question

Below is a graph of the short run. Refer to the graph to answer the following three questions 1. Move the money supply curve to show what would happen if the Bank of Canada (BoC) chose to decrease the money supply. Assume that the B over the money supply 2. As a result of the change, the interest rate at the equilibrium has complete control falls O does not change rises Money Supply 3. What leads to the adjustment in the interest rate at the equilibrium? An increase in the demand for money The BoC sets a higher national interest rate A decrease in the demand for money The BoC sets a lower national interest rate Money Demand Quantity of Money (billions of $)

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Answer #1

a) The graph will look like this after reducing the money supply.

Decrease in the money supply will increase the interest rates. CDD CCD r2 r1 Md 0 Ms2 Ms1 M/P

b) As a result of the change the interest rates "rises".

c) A decrease in the demand for the money at a higher rate. At the higher interest rate, the demand for the money will decrease. People will keep more money in the banks to earn an interest and spend less.

The answer is "An decrease in the demand for money."

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