If the Fed unexpectedly decreases the money supply, real GDP
A) increases because the resulting increase in the interest rate leads to a decrease in investment.
B) increases because the resulting decrease in the interest rate leads to an increase in investment.
C) decreases because the resulting increase in the interest rate leads to a decrease in investment.
D) decreases because the resulting increase in the interest rate leads to an increase in investment.
E) decreases because the resulting decrease in the interest rate leads to an increase in investment.

Question

Quizplus · Accepted Answer

When the Fed unexpectedly decreases the money supply, it leads to an increase in the interest rate, which makes borrowing more expensive. This, in turn, leads to a decrease in investment, as businesses will find it less attractive to borrow money to expand. A decrease in investment will lead to a decrease in real GDP.

If the Fed Unexpectedly Decreases the Money Supply, Real GDP