Other things equal, a restrictive monetary policy during a period of demand-pull inﬂation will
A) lower the interest rate, increase investment, and reduce net exports.
B) lower the price level, increase investment, and increase aggregate demand.
C) increase productivity, aggregate supply, and real output.
D) increase the interest rate, reduce investment, and reduce aggregate demand.

Question

Quizplus · Accepted Answer

A restrictive monetary policy involves raising interest rates and reducing the money supply, which tends to decrease investment and aggregate demand. During a period of demand-pull inflation, where demand for goods and services is outstripping supply, a restrictive monetary policy can help to cool down the economy and reduce inflationary pressures. Therefore, the correct choice is D, which states that a restrictive monetary policy during a period of demand-pull inflation will increase the interest rate, reduce investment, and reduce aggregate demand.

Other Things Equal, a Restrictive Monetary Policy During a Period