Contractionary monetary policy ________ interest rates,by ________ the ________.
A) raises; decreasing; supply of loanable funds
B) raises; increasing; demand for loanable funds
C) lowers; decreasing; short-run aggregate supply
D) lowers; increasing; aggregate demand
E) raises; increasing; long-run aggregate supply

Question

Quizplus · Accepted Answer

Contractionary monetary policy is used to decrease aggregate demand and control inflation. This is done by increasing interest rates, making borrowing more expensive and decreasing the supply of loanable funds, which reduces investment and consumption spending. Option A correctly describes this process. Option B is incorrect because increasing the demand for loanable funds would lead to higher interest rates, which is contrary to contractionary policy. Option C is incorrect because decreasing short-run aggregate supply would lead to higher prices and inflation, which is the problem contractionary policy aims to solve. Option D is incorrect because increasing aggregate demand would exacerbate inflation, while contractionary policy aims to decrease it. Option E is incorrect because long-run aggregate supply is determined by factors like technology and labor, which monetary policy cannot directly affect.

Contractionary Monetary Policy ________ Interest Rates,by ________ the ________

Contractionary Monetary Policy Interest Rates,by the