Question

Other things equal, if the supply of money is reduced:

Answers:
the demand for money will increase.

the interest rates will fall.

bond prices will fall.

investment spending will increase.

Answer 1

If the supply of money is reduced, the most likely consequence among the options provided is:

- **Bond prices will fall.**

Here’s the reasoning:

1. **The demand for money will increase:** This statement is not accurate in this context. A reduction in the supply of money typically leads to an increase in interest rates, which may reduce the demand for money.

2. **The interest rates will fall:** This is incorrect. A reduction in the supply of money generally leads to an increase in interest rates because money becomes scarcer.

3. **Bond prices will fall:** This is true. When interest rates rise (due to a reduction in the money supply), existing bonds with lower interest rates become less attractive, leading to a decrease in their prices.

4. **Investment spending will increase:** This is unlikely. Higher interest rates typically discourage investment spending, as borrowing costs increase.

Thus, the most accurate answer is that bond prices will fall.