If the economy is in general equilibrium and the Fed reduces the money supply,
A)the previous equilibrium combination of output and the real interest rate represents a point of excess demand for money.
B)the previous equilibrium combination of output and the real interest rate represents a point where saving is greater than investment.
C)the LM curve shifts down and to the right.
D)the level of investment spending will increase.

Question

Quizplus · Accepted Answer

When the Fed reduces the money supply, it creates a situation where there is less money available in the economy. Since the money supply has decreased, the demand for money will exceed the supply, resulting in excess demand for money. This excess demand will lead to an increase in the real interest rate in order to restore equilibrium. Therefore, the previous equilibrium combination of output and the real interest rate represents a point of excess demand for money.

If the Economy Is in General Equilibrium and the Fed