In the short run, a decrease in the money supply causes interest rates and aggregate demand to do what?
A) It causes interest rates to increase and aggregate demand to shift right.
B) It causes interest rates to increase and aggregate demand to shift left.
C) It causes interest rates to decrease and aggregate demand to shift right.
D) It causes interest rates to decrease and aggregate demand to shift left.

Question

Quizplus · Accepted Answer

In the short run, a decrease in the money supply leads to a decrease in the supply of loanable funds, which causes interest rates to increase. This increase in interest rates leads to a decrease in consumption and investment, which shifts aggregate demand to the left. Therefore, the correct answer is B.

In the Short Run, a Decrease in the Money Supply