A decrease in the money supply is likely to cause a(n) _____ in borrowing, a(n) _____ interest rates and a(n) _____ in aggregate demand.
A) decrease; increase; decrease
B) decrease; increase; increase
C) increase; decrease; decrease
D) increase; decrease; increase

Question

Quizplus · Accepted Answer

A decrease in the money supply means that there is less money available for borrowing. This leads to a decrease in borrowing, as well as an increase in interest rates due to the limited supply of money available for lending. Higher interest rates make borrowing more expensive and, therefore, decrease the demand for credit. With a decrease in borrowing and credit, aggregate demand also decreases.

A Decrease in the Money Supply Is Likely to Cause