In the medium run, if government purchases are increased and nominal money supply is decreased, we can expect that
A)aggregate demand and prices will increase but interest rates will not change
B)aggregate demand, prices, and the interest rate will all decrease
C)aggregate demand and interest rates will decrease but prices will increase
D)the AD-curve will shift to the right and the AS-curve will shift to the left
E)the interest rate will increase while aggregate demand and prices may increase, decrease, or remain the same

Question

Quizplus · Accepted Answer

Increasing government purchases typically increases aggregate demand and can push prices up. However, decreasing the nominal money supply tends to increase interest rates (as money becomes scarcer) and can reduce aggregate demand (as borrowing becomes more expensive). The net effect on aggregate demand and prices depends on the relative strength of these two opposing forces, making E the correct choice as it captures the complexity of these interactions.

In the Medium Run, If Government Purchases Are Increased and Nominal