Which of the following is likely to happen if a contractionary monetary policy is adopted?
A) The aggregate price level will increase.
B) The real interest rate will increase.
C) Real wages will fall.
D) Unemployment will fall.

Question

Quizplus · Accepted Answer

Contractionary monetary policy involves a decrease in the money supply, which leads to an increase in the interest rate. This, in turn, decreases the amount of borrowing and spending in the economy, leading to a decrease in aggregate demand and ultimately causing a decrease in inflation. The increase in the interest rate leads to an increase in the real interest rate, which is adjusted for inflation, making borrowing more expensive and savings more attractive. None of the other options listed align with the effects of contractionary monetary policy.

Which of the Following Is Likely to Happen If a Contractionary