The short run sequence of events following an unanticipated shift to a more restrictive monetary policy would be
A) lower interest rates, decrease in aggregate demand, and a reduction in output.
B) lower interest rates, increase in aggregate demand, and an expansion in output.
C) higher interest rates, decrease in aggregate demand, and a reduction in output.
D) higher interest rates, increase in aggregate demand, and an expansion in output.

Question

Quizplus · Accepted Answer

An unanticipated shift to a more restrictive monetary policy leads to higher interest rates, which reduces borrowing and investment. This causes a decrease in aggregate demand, ultimately resulting in a reduction in output.

The Short Run Sequence of Events Following an Unanticipated Shift