When the Fed unexpectedly decreases the money supply,
A) real interest rates will tend to decline.
B) the exchange rate value of the dollar will tend to appreciate.
C) aggregate demand will tend to increase.
D) there is generally no impact on the economy.

Question

Quizplus · Accepted Answer

When the Fed unexpectedly decreases the money supply, it becomes more expensive to borrow money, which tends to increase real interest rates. As a result, foreign investors will find U.S. bonds more attractive, causing an increase in the demand for dollars, and the exchange rate value of the dollar will tend to appreciate.

When the Fed Unexpectedly Decreases the Money Supply