A) increase the interest rate from 3 percent to 9 percent.
B) increase the money supply from $100 to $120.
C) decrease the money supply from $120 to $100.
D) decrease the interest rate from 9 percent to 3 percent.

Question

A) increase the interest rate from 3 percent to 9 percent. 
B) increase the money supply from $100 to $120. 
C) decrease the money supply from $120 to $100. 
D) decrease the interest rate from 9 percent to 3 percent.

Quizplus · Accepted Answer

According to the quantity theory of money, there is a direct relationship between the money supply and prices. If the money supply increases, prices will increase; if the money supply decreases, prices will decrease. Therefore, the best choice to reduce the price level in the economy is to decrease the money supply from $120 to $100. Increasing the interest rate would decrease spending and investment, but it may not necessarily lead to a decrease in prices.

A) Increase the Interest Rate from 3 Percent to 9