Contractionary monetary policy causes _____ in the price level in the short run and _____ in the price level in the long run.

Question

Quizplus · Accepted Answer

Contractionary monetary policy reduces the money supply, which raises interest rates and reduces aggregate demand. This leads to a decrease in the price level in the short run. However, over the long run, the economy adjusts and potential output decreases. This leads to a further decrease in the price level. So, the price level decreases in both the short run and long run under contractionary monetary policy, making option B the correct answer.

Contractionary Monetary Policy Causes _____ in the Price Level in the Short