If the Fed contracts the money supply, a. the price level will rise. b. interest rates will rise. c. firms will increase their levels of investment. d. aggregate demand will increase.

If the Fed contracts the money supply,

a. the price level will rise.

b. interest rates will rise.

c. firms will increase their levels of investment.

d. aggregate demand will increase.

 

answer:

The correct answer is B. If the Fed contracts the money supply the the LM curve will shift leftwards and the interest rates will increase and the output level will fall. This will cause the aggregate demand to fall as well. As money supply falls, interest rates rise and so the correct answer is B.

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