Other Things Remaining the Same, If There Was a Decrease

question 96

Multiple Choice

Other things remaining the same, if there was a decrease in money supply, which of the following would occur?

• A) The equilibrium interest rate will increase.
• B) The equilibrium level of real money balances will increase.
• C) The supply of money will become perfectly elastic.
• D) Both real money balances and the interest rate will remain unchanged.

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Definitions:

Inflation Rate

The rate at which the general level of prices for goods and services is rising, and, subsequently, eroding purchasing power.

Annual Output

The total value of goods and services produced by an economy or a firm in one year.

Rational Expectations

The economic theory suggesting individuals make decisions based on their logical expectations for the future, effectively using all available information to predict future events accurately.

Long-Run Phillips Curve

A concept suggesting that in the long term, there is no trade-off between inflation and unemployment, implying that inflation does not affect the natural rate of unemployment.