Chapter 31, Problem 7MCQ

To determine

The correct option that indicates how a decrease in the money supply will ultimately affect GDP.

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.

Economics Concept Introduction

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.