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 leave real GDP unchanged.
C)raise nominal interest rates, lower the price level, and leave real GDP unchanged.
D)lower real interest rates, raise the price level, and increase real GDP.

Question

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 leave real GDP unchanged.
C)​raise nominal interest rates, lower the price level, and leave real GDP unchanged.
D)​lower real interest rates, raise the price level, and increase real GDP.

Quizplus · Accepted Answer

An unanticipated decrease in the money supply will lead to a contractionary shift in the AD curve. This leads to a decrease in real GDP and a decrease in the price level. The decrease in AD also leads to an increase in real interest rates as the demand for loanable funds decreases.

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