How will a decrease in the money supply affect interest rates and aggregate demand in the short term?
A) Interest rates will increase, and aggregate demand will shift to the right.
B) Interest rates will increase, and aggregate demand will shift to the left.
C) Interest rates will decrease, and aggregate demand will shift to the right.
D) Interest rates will decrease, and aggregate demand will shift to the left.

Question

How will a decrease in the money supply affect interest rates and aggregate demand in the short term?  
A) Interest rates will increase, and aggregate demand will shift to the right. 
B) Interest rates will increase, and aggregate demand will shift to the left. 
C) Interest rates will decrease, and aggregate demand will shift to the right. 
D) Interest rates will decrease, and aggregate demand will shift to the left.

Quizplus · Accepted Answer

A decrease in the money supply typically leads to higher interest rates as there is less money available for borrowing. Higher interest rates make borrowing more expensive, which can reduce spending and investment, leading to a shift in aggregate demand to the left.

How Will a Decrease in the Money Supply Affect Interest