A decrease in money supply causes the real interest rate to ________ and output to ________ in the short run,before prices adjust to restore equilibrium.
A)rise; rise
B)rise; fall
C)fall; rise
D)fall; fall

Question

Quizplus · Accepted Answer

A decrease in money supply will cause an increase in the real interest rate because of a decrease in demand for credit. This, in turn, will lead to a decrease in output since consumers and businesses will reduce their spending due to the higher borrowing costs. Therefore, the correct choice is B, where the real interest rate rises, and output falls.

A Decrease in Money Supply Causes the Real Interest Rate