Suppose the money supply decreases.How is GDP affected?
A) GDP increases because the resulting increase in the interest rate leads to a decrease in investment.
B) GDP increases because the resulting decrease in the interest rate leads to an increase in investment.
C) GDP decreases because the resulting increase in the interest rate leads to a decrease in investment.
D) GDP decreases because the resulting decrease in the interest rate leads to an increase in investment.

Question

Suppose the money supply decreases.How is GDP affected?  
A) GDP increases because the resulting increase in the interest rate leads to a decrease in investment. 
B) GDP increases because the resulting decrease in the interest rate leads to an increase in investment. 
C) GDP decreases because the resulting increase in the interest rate leads to a decrease in investment. 
D) GDP decreases because the resulting decrease in the interest rate leads to an increase in investment.

Quizplus · Accepted Answer

A decrease in the money supply leads to an increase in interest rates. Higher interest rates lead to a decrease in investment because it becomes more expensive for businesses to borrow money to finance their investments. This decrease in investment leads to a decrease in GDP.

Suppose the Money Supply Decreases