A decrease in the money supply:
A) raises the interest rate, causing an increase in investment and an increase in GDP.
B) lowers the interest rate, causing an increase in investment and an increase in GDP.
C) raises the interest rate, causing a decrease in investment and a decrease in GDP.
D) lowers the interest rate, causing a decrease in investment and an increase in GDP.
E) lowers the interest rate, causing a decrease in investment and a decrease in GDP.

Question

Quizplus · Accepted Answer

Decreasing the money supply causes an increase in the interest rate as it becomes more expensive to borrow money. This increase in the interest rate will cause a decrease in investment as it becomes less attractive to borrow money for investment purposes. This decrease in investment will lead to a decrease in GDP.

A Decrease in the Money Supply