The correct option that indicates how a decrease in the money supply will ultimately affect
Answer to Problem 7MCQ
From the available options, the correct option is ↓MS→↑đ�“²→↓I→↓C→↓AD→↓real GDP.
Explanation of Solution
A central bank's alteration of the money supply affects interest rates, which affect aggregate demand along with investment. When there is a decrease in Money Supply (MS), there will be an increase in interest rate (i) but this causes a decrease in Investment (I), Consumption (C)Aggregate Demand (AD). These all factors then, in turn, decrease the real GDP in the economy. It means the options which show a decrease in interest, increase in investment, increase in consumption, and aggregate demand are incorrect.
Therefore, the correct option is b (↓MS→↑đ�“²→↓I→↓C→↓real GDP) and all other options are incorrect.
Introduction: The total amount of money such as including cash, coins, and balances in the circulation of an economy is known as the money supply.
Chapter 31 Solutions
Krugman's Economics For The Ap® Course
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