Suppose the central bank reduces the money supply.This monetary contraction will always cause a greater reduction in output when it is accompanied by

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Quizplus · Accepted Answer

A reduction in the money supply typically leads to higher interest rates and lower investment and consumption in the short run. When this is combined with an increase in expected future taxes, individuals and businesses are likely to reduce their current spending further in anticipation of higher future costs, exacerbating the reduction in output. An increase in expected future interest rates can discourage borrowing and investment today, further reducing current output. Similarly, a reduction in expected future output can lead to decreased current spending by businesses and consumers due to pessimistic future revenue and income expectations, again amplifying the initial reduction in output. Therefore, all of the mentioned factors (A, B, and C) would likely cause a greater reduction in output when occurring alongside a monetary contraction.

Suppose the Central Bank Reduces the Money Supply