Question

Question 25 1 pts Contractionary Monetary Policy would cause which of the following to happen in the short run? 1. A decrease in GDP 2. An increase in the price level 3. An increase in the interest rate 0 1 and 2 О 1 and 3 O 2 and 3 O 2 only O 3 only 1, 2, and 3 O 1only Search o 31 E DOLL 4 F6 FO FO F10 F11 F12 @ % $ 4 & * 3 5 6 7 00 9 W E R. T Y U o P S DF G H J K L

Answer 1

Option B is correct - 1 and 3

Contractionary monetary is a tool that is used during inflation in the economy to decrease the money supply and thus decrease the average price level in the country. During inflation, there is an average rise in prices in the economy. This happens because people have excess money with them that increases consumption expenditure and investment expenditure to the level that increases aggregate demand more than the aggregate supply in the economy causing the prices to rise in the economy resulting in inflation.

Under this condition, the contractionary monetary policy is used. The aim of this policy is to decrease the excess money supply in the economy. The federal controls the monetary policy and thus under the contractionary monetary policy it increases the interest rate in the economy. An increase in interest rate will lead to a decrease in investments and consumption expenditure and increase savings.

A decrease in investments will lower the production level in the country thus causing the GDP of the country to decrease. Thus, a contractionary monetary policy will result in an increase in the interest rates and a decrease in the GDP of the country.