A reduction in the money supply will result in
A) a lower interest rate and more negative output gap.
B) a higher interest rate and more positive output gap.
C) a lower interest rate and more positive output gap.
D) a higher interest rates and more negative output gap.

Question

Quizplus · Accepted Answer

A reduction in the money supply leads to higher interest rates as it becomes more expensive for businesses and individuals to borrow money. This decrease in borrowing leads to a decrease in spending, which results in a more negative output gap. Therefore, the correct choice is D.

A Reduction in the Money Supply Will Result in