Which of the following descriptions best depicts the short-run effect of a leftward shift of the monetary policy line?
A)An increase in the rate of interest and a decline in both the rate of inflation and real GDP
B)A decline in both the rate of inflation and the rate of interest, along with an increase in real GDP
C)An increase in the rate of interest, no change in the rate of inflation, and a decline in real GDP
D)A decline in real GDP and no change in either the rate of inflation or the rate of interest
E)A decline in the rate of inflation, the rate of interest, and real GDP

Question

Quizplus · Accepted Answer

A leftward shift of the monetary policy line indicates that the central bank is tightening monetary policy by decreasing the money supply or increasing interest rates. This will lead to an increase in the rate of interest. However, it will also cause a decrease in aggregate demand, leading to a decline in real GDP. The rate of inflation may remain the same or even increase due to supply-side factors. Therefore, option C is the best choice as it matches this description.

Which of the Following Descriptions Best Depicts the Short-Run Effect