Which statement correctly describes the sequence that explains how a contractionary monetary policy impacts an economy?
A) The policy lowers interest rates; lower interest rates increase investment; and higher investment increases aggregate demand, which impacts output and the price level.
B) The policy lowers interest rates; lower interest rates discourage investment; and lower investment decreases aggregate demand, which impacts output and the price level.
C) The policy raises interest rates; higher interest rates reduce spending; and lower spending reduces aggregate demand, which impacts output and the price level.
D) The policy raises interest rates; higher interest rates attract more savings; and higher savings fuels investment growth which raises aggregate demand, which impacts output and the price level.

Question

Quizplus · Accepted Answer

A contractionary monetary policy is implemented when the central bank aims to reduce the money supply in order to control inflation. This is done by raising interest rates, making borrowing more expensive and reducing spending overall. As a result, aggregate demand decreases, which leads to a decrease in output and prices.

Which Statement Correctly Describes the Sequence That Explains How a Contractionary