Economics: What would happen if the Bank of Canada reduced money supply?
If the Bank of Canada were to reduce money supply, what would happen to the purchasing power of the dollar, real output and the value of the dollar in foreign exchange markets?
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Reducing the money supply raises the real interest rates, and increases the value of each dollar since there are fewer total dollars in the economy. Fewer dollars have to buy the same products, therefore, dollars are worth more on the foreign exchange markets.