When contractionary monetary policy increases the interest rate, the price level _______ and output _______.
A) decreases; decreases
B) increases; increases
C) decreases; increases
D) increases; decreases

Question

Quizplus · Accepted Answer

Contractionary monetary policy, which typically involves increasing interest rates, leads to a decrease in spending and investment. This reduction in demand generally causes the price level to decrease and output to decrease as well, as businesses respond to lower demand by reducing production.

When Contractionary Monetary Policy Increases the Interest Rate, the Price