Assume that investment spending depends only on the interest rate and no longer depends on output. Given this information, a decrease in money supply:

Question

Quizplus · Accepted Answer

Since investment spending depends only on the interest rate, a decrease in money supply will lead to an increase in interest rates. This increase in interest rates will lead to a decrease in investment spending, thus causing investment to decrease. This will ultimately lead to a reduction in output.

Assume That Investment Spending Depends Only on the Interest Rate