Identify the correct statement about changes in money supply.
A)A decrease in money supply causes interest rates to fall.
B)A decrease in money supply causes investment spending to increase.
C)A decrease in money supply causes gross domestic product to increase.
D)A decrease in money supply causes investment spending to decrease.
E)A decrease in money supply causes aggregate expenditure to increase.

Question

Quizplus · Accepted Answer

A decrease in money supply causes interest rates to rise, which in turn causes a decrease in investment spending. This is because the cost of borrowing becomes more expensive, reducing the incentive for firms to invest.

Identify the Correct Statement About Changes in Money Supply