An unanticipated shift to a more restrictive monetary policy by the Fed will
A) increase real interest rates and, thereby, reduce investment, current consumption, and aggregate demand.
B) reduce real interest rates, leading to a depreciation of the dollar and an expansion in net exports and aggregate demand.
C) increase real interest rates, leading to higher asset prices that will stimulate aggregate demand.
D) reduce real interest rates and, thereby, stimulate investment, current consumption, and aggregate demand.

Question

Quizplus · Accepted Answer

An unanticipated shift to a more restrictive monetary policy by the Fed will increase real interest rates, as borrowing costs increase. This will lead to a decrease in investment and borrowing in the economy, and consumers will also be affected as rates on mortgages and other loans increase. This decrease in investment and consumption will decrease aggregate demand in the economy.

An Unanticipated Shift to a More Restrictive Monetary Policy by the Fed