Which of the following best describes the cause-effect chain of a restrictive monetary policy?
A) A decrease in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.
B) A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.
C) An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.
D) An increase in the money supply will lower the interest rate, decrease investment spending, and increase aggregate demand and GDP.

Question

Quizplus · Accepted Answer

A restrictive monetary policy involves decreasing the money supply, which leads to a higher interest rate due to increased demand for the limited amount of available funds. This higher interest rate will discourage investment spending and borrowing by consumers, which will in turn decrease aggregate demand and GDP.

Which of the Following Best Describes the Cause-Effect Chain of a Restrictive