Question

Contractionary monetary policy on the part of the Fed results in an increase in the money...

Contractionary monetary policy on the part of the Fed results in

an increase in the money supply, a decrease in interest rates, and an increase in GDP.

a decrease in the money supply, an increase in interest rates, and a decrease in GDP.

an increase in the money supply, an increase in interest rates, and an increase in GDP.

a decrease in the money supply, a decrease in interest rates, and a decrease in GDP.

Homework Answers

Answer #1

Option 2

a decrease in the money supply, an increase in interest rates, and a decrease in GDP

Monetary policy uses money supply as a tool to control economic stability. Contractionary policy is used to control the inflationary gap where the money supply is decreased to increase interest rate and decrease GDP and price level to control inflation.

A decrease in money supply increases the opportunity cost of money and increases the interest rate, an increase in interest rate decreases consumption and investment spending as the opportunity cost of consumption and investment increases.

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