If CBN reduces money supply; the interest rate will?

A. fluctuate
B. rise
C. fall
D. remain unchanged

Correct Answer:

Option B – rise

Explanation

The interest rates will be high if CBN reduces money supply. This is done to discourage borrowing and control the flow of money in the economy. It is mostly done when there is excess money in circulation. CBN would raise the interest rates to discourage borrowing and encourage savings and investments, thereby mopping out the excess money in circulation.