In the aggregate demand-aggregate supply model, the short-run effects of an unanticipated decrease in the money supply will be
A) lower real interest rates and an increase in aggregate demand.
B) higher real interest rates and an increase in aggregate demand.
C) lower real interest rates and a reduction in aggregate demand.
D) higher real interest rates and a reduction in aggregate demand.

Question

Quizplus · Accepted Answer

An unanticipated decrease in the money supply will lead to an increase in real interest rates due to a decrease in the supply of funds available for borrowing. This will lead to a decrease in investment, consumption, and aggregate demand in the short run. Therefore, the correct option is D: higher real interest rates and a reduction in aggregate demand.

In the Aggregate Demand-Aggregate Supply Model, the Short-Run Effects of an Unanticipated