When the Fed unexpectedly reduces the money supply, it will cause a decrease in aggregate demand because
A) real interest rates will rise, lowering business investment and consumer spending.
B) the dollar will depreciate on the foreign exchange market, leading to an increase in net exports.
C) lower interest rates will cause the value of assets (for example, stocks) to rise.
D) the national debt will increase, causing consumers to reduce their spending.

Question

Quizplus · Accepted Answer

When the Fed unexpectedly reduces the money supply, real interest rates will rise. This higher cost of borrowing will discourage both business investment and consumer spending, leading to a decrease in aggregate demand.

When the Fed Unexpectedly Reduces the Money Supply, It Will