When contractionary monetary policy increases the interest rate, it causes the price level to:
A) decrease, and output to decrease.
B) rise, and output to increase.
C) decrease, and output to increase.
D) rise, and output to decrease.

Question

Quizplus · Accepted Answer

Contractionary monetary policy increases interest rates, which typically reduces investment and consumer spending, leading to a decrease in aggregate demand. This results in a lower price level and reduced output.

When Contractionary Monetary Policy Increases the Interest Rate, It Causes