In the short run, a rise in the federal funds rate shifts the

Question

Quizplus · Accepted Answer

An increase in the federal funds rate increases the cost of borrowing for banks, which leads to a reduction in the quantity of money that they can lend out to borrowers. This decrease in the money supply shifts the aggregate demand (AD) curve leftward, as there is less money available for spending and investment, which leads to a decrease in output and an increase in the price level in the short run.

In the Short Run, a Rise in the Federal Funds