When the central bank contracts the money supply, the interest rate rises to bring the money market into equilibrium and reduces the quantity of goods and services demanded for any given price level. This:
A) shifts the aggregate demand curve to the right.
B) shifts the aggregate demand curve to the left.
C) shifts the aggregate supply curve to the right.
D) shifts the aggregate supply curve to the left.

Question

Quizplus · Accepted Answer

When the central bank contracts the money supply, the interest rate rises, which makes borrowing more expensive and reduces spending. This leads to a decrease in the quantity of goods and services demanded for any given price level, which in turn causes a leftward shift in the aggregate demand curve.

When the Central Bank Contracts the Money Supply, the Interest