If the economy is operating in the relatively steep (upper) portion of its aggregate supply curve, a reduction in the money supply will
A)increase the interest rate and increase employment.
B)reduce the interest rate and increase employment.
C)increase the interest rate and reduce the price level, assuming it is flexible downward.
D)reduce the interest rate and increase the price level.

Question

Quizplus · Accepted Answer

In the steep portion of the aggregate supply curve, output is less responsive to changes in demand, so a reduction in the money supply will increase interest rates and reduce the price level, assuming prices can adjust downward.

If the Economy Is Operating in the Relatively Steep (Upper)