Suppose the Reserve Bank of Australia pursues contractionary monetary policy. This policy move will tend to cause:

Question

Quizplus · Accepted Answer

Contractionary monetary policy will decrease the money supply, which will lead to a decrease in inflation and a decrease in aggregate demand. As a result, interest rates will fall in the medium run. However, the decrease in money supply will increase the demand for money and lead to a decrease in investment, which will lead to a decrease in real GDP and output. Thus, the economy will experience a decrease in i in the medium run and no change in r in the medium run.

Suppose the Reserve Bank of Australia Pursues Contractionary Monetary Policy