Concept:When a central bank reduces the money supply, the cost of borrowing money moves in the opposite direction.
Explanation:If CBN reduces the money supply, fewer funds are available for banks to lend out.
Since the demand for money does not fall at the same time, lenders can charge more for the limited funds available.
This causes the interest rate to rise.
It is a contractionary monetary policy tool used to discourage borrowing and reduce the amount of money circulating in the economy.
With less money chasing goods and services, inflation is controlled and savings are encouraged.
Therefore, the interest rate will not remain unchanged, fall, or fluctuate suddenly; it will increase.
Answer:B. rise