Figure 34-4. On the figure, MS represents money supply and MD represents money demand.
-Refer to Figure 34-4. Suppose the current equilibrium interest rate is r3. Let Y3 represent the corresponding quantity of goods and services demanded, and let P3 represent the corresponding price level. Starting from this situation, if the Federal Reserve decreases the money supply and if the price level remains at P3, then
A) there will be an increase in the equilibrium quantity of goods and services demanded.
B) there will be a decrease in the equilibrium interest rate.
C) the aggregate-demand curve will shift to the right.
D) fewer firms will choose to borrow to build new factories and buy new equipment.

Question

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. 
-Refer to Figure 34-4. Suppose the current equilibrium interest rate is r3. Let Y3 represent the corresponding quantity of goods and services demanded, and let P3 represent the corresponding price level. Starting from this situation, if the Federal Reserve decreases the money supply and if the price level remains at P3, then
A) there will be an increase in the equilibrium quantity of goods and services demanded. 
B) there will be a decrease in the equilibrium interest rate. 
C) the aggregate-demand curve will shift to the right. 
D) fewer firms will choose to borrow to build new factories and buy new equipment.

Quizplus · Accepted Answer

A decrease in the money supply leads to higher interest rates, making borrowing more expensive. Consequently, fewer firms will choose to borrow for investments like building new factories or buying new equipment.