The most likely short-run impact of an unanticipated decrease in the money supply is a(n)
A)decrease in the real interest rate,which in turn reduces investment and real GDP.
B)increase in the real interest rate,which in turn reduces investment and real GDP.
C)increase in real output,which causes the interest rate to rise and in turn reduces investment and real GDP.
D)decrease in real output,which causes the real interest rate to rise.

Question

Quizplus · Accepted Answer

An unanticipated decrease in the money supply will cause an increase in the interest rate as there is less money available to lend. Higher interest rates will lower investment and real GDP, as borrowing for investment becomes more expensive. Therefore, option B is the most likely short-run impact. Option A is incorrect because a decrease in the money supply will lead to an increase in the real interest rate, not a decrease. Option C is incorrect because an increase in real output is not likely as the decrease in the money supply will lead to a fall in investment, which will reduce output. Option D is also incorrect because a decrease in real output is more likely to occur in this scenario.

The Most Likely Short-Run Impact of an Unanticipated Decrease in the Money