Which Statement Correctly Describes the Sequence That Explains How a Contractionary

question 262

Multiple Choice

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; higher investment increases aggregate demand, which impacts output and the price level.
• B) The policy lowers interest rates; lower interest rates discourage investment; lower investment decreases aggregate demand, which impacts output and the price level.
• C) The policy raises interest rates; higher interest rates reduce spending; lower spending reduces aggregate demand, which impacts output and the price level.
• D) The policy raises interest rates; higher interest rates attract more savings; higher savings fuels investment growth which raises aggregate demand, which impacts output and the price level.

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Definitions:

Scale Economies Index

A measurement that assesses the advantages a business gains due to the scale of its operation, typically resulting in reduced costs per unit as production increases.

Cost-Output Elasticity

The responsiveness of the cost of producing a good or service to changes in the level of output.

Diseconomies of Scale

A situation where a business grows so large that the costs per unit increase. It occurs when economies of scale no longer function for a firm.

Production Function

An equation or model that describes the relationship between inputs used in production and the output produced.