In a closed economy, a contractionary monetary policy causes:
A) interest rates to rise and aggregate demand to increase.
B) interest rates to fall and aggregate demand to decrease.
C) interest rates to rise and aggregate demand to decrease.
D) interest rates to fall and aggregate demand to increase.
E) interest rates to fall and aggregate demand to be unchanged.

Question

Quizplus · Accepted Answer

Contractionary monetary policy typically involves reducing the money supply or increasing interest rates, which makes borrowing more expensive. This leads to a decrease in spending and investment, causing aggregate demand to decrease.

In a Closed Economy, a Contractionary Monetary Policy Causes