Starting from a position of macroeconomic equilibrium at the full-employment level of real GDP, in the short run, an unanticipated decrease in the money supply will:
A)raise real interest rates, lower the price level, and reduce real GDP.
B)raise real interest rates, lower the price level, and increase real GDP.
C)raise nominal interest rates, raise the price level, and leave real GDP unchanged.
D)lower real interest rates, raise the price level, and increase real GDP.
E)lower real interest rate, lower the price level, and increase real GDP.

Question

Quizplus · Accepted Answer

An unanticipated decrease in the money supply will lead to an increase in real interest rates, as the demand for money exceeds the reduced supply. This will lead to a decrease in investment and consumption spending, and therefore, a decrease in real GDP. The reduction in the money supply will also lead to a decrease in aggregate demand, which will lead to a decrease in the price level.

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