In the IS-LM model when the Bank of Canada decreases the money supply, the public _____ bonds, and the interest rate _____, leading to a(n) _____ in investment and income. This is called the monetary transmission mechanism.
A)buy; rises; increase
B)sell; falls; decrease
C)sell; rises; decrease
D)buy; rises; decrease

Question

Quizplus · Accepted Answer

When the Bank of Canada decreases the money supply, the public sells bonds to obtain money, causing the interest rate to rise. This increase in interest rates leads to a decrease in investment and income, illustrating the monetary transmission mechanism.

In the IS-LM Model When the Bank of Canada Decreases