Which of the following is true about the short run effects of a contractionary monetary policy in Keynesian model?
A)Output declines,price level declines,real interest rate rises.
B)Output increases,price level increases,real interest rate declines.
C)Output increases,price level increases,real interest rate increases.
D)Output declines,price level declines,real interest rate declines.

Question

Quizplus · Accepted Answer

In the Keynesian model, a contractionary monetary policy (i.e. a decrease in the money supply) leads to a decrease in aggregate demand, which causes output to decline. As output decreases, businesses lower their prices in response to less demand. This leads to a decline in the price level. Finally, since the nominal interest rate is set by the central bank, a contractionary monetary policy increases the real interest rate (nominal interest rate minus expected inflation rate), which reduces investment and further decreases output.

Which of the Following Is True About the Short Run