If the economy is operating in the relatively steep (upper) portion of its aggregate supply curve, a reduction in the money supply will
A) increase the interest rate and increase employment.
B) reduce the interest rate and increase employment.
C) increase the interest rate and reduce the price level, assuming it is ﬂexible downward.
D) reduce the interest rate and increase the price level.

Question

Quizplus · Accepted Answer

A reduction in the money supply will lead to a decrease in aggregate demand, causing the economy to move up the aggregate supply curve. If the economy is operating in the relatively steep (upper) portion of its aggregate supply curve, the reduction in aggregate demand will mainly lead to a decrease in the price level, assuming it is flexible downward. Additionally, the decrease in aggregate demand will lead to a decrease in real output and a decrease in employment. However, the interest rate will increase as a result of the decrease in money supply.

If the Economy Is Operating in the Relatively Steep (Upper)