Assume a starting position of macroeconomic equilibrium at the full-employment level of real GDP.In the short run,what effect will a decrease in the money supply have?
A)It will lower real interest rates, raise the price level, and increase real GDP.
B)It will raise real interest rates, lower the price level, and leave real GDP unchanged.
C)It will raise nominal interest rates, lower the price level, and leave real GDP unchanged.
D)It will raise real interest rates, lower the price level, and reduce real GDP.

Question

Quizplus · Accepted Answer

A decrease in the money supply will lead to a decrease in aggregate demand, which causes a decrease in both prices and real GDP in the short run. The decrease in demand for loanable funds will also lead to an increase in interest rates. Overall, this will lead to a decrease in real GDP and an increase in interest rates, while the price level will decrease.

Assume a Starting Position of Macroeconomic Equilibrium at the Full-Employment