If the economy experiences an inflationary gap, a contractionary monetary policy will _______ real GDP and _______ the price level.

Question

Quizplus · Accepted Answer

A contractionary monetary policy reduces the money supply, which leads to higher interest rates. Higher interest rates discourage borrowing and spending, which reduces aggregate demand. As aggregate demand decreases, real GDP decreases. The decrease in aggregate demand also reduces the demand for goods and services, which leads to a decrease in the price level.

If the Economy Experiences an Inflationary Gap, a Contractionary Monetary