When the Fed reduces the money supply, it will cause a decrease in aggregate demand because:
A) real rates will rise, lowering business investment and consumer spending.
B) the dollar will depreciate on the foreign exchange market, leading to an increase in net exports.
C) lower interest rates will cause the value of assets (for example, stocks) to rise.
D) the national debt will increase, causing consumers to reduce their spending.

Question

Quizplus · Accepted Answer

When the Fed reduces the money supply, it leads to an increase in real interest rates, which in turn can lead to a decrease in business investment and consumer spending, ultimately reducing aggregate demand.

When the Fed Reduces the Money Supply, It Will Cause