A Decrease in Money Supply Causes the Real Interest Rate

question 27

Multiple Choice

A decrease in money supply causes the real interest rate to ________ and the price level to ________ in general equilibrium.

• A)rise; rise
• B)remain unchanged; fall
• C)remain unchanged; rise
• D)fall; fall

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Definitions:

Unemployment

The situation in which individuals who are capable of working and are actively seeking employment are unable to find a job.

Contractionary Monetary Policy

A monetary policy strategy used by central banks to reduce inflation and cool an overheated economy by increasing interest rates and reducing the supply of money.

Phillips Curves

A graphical representation showing an inverse relationship between the rate of unemployment and the rate of inflation in an economy.

Phillips Curve

A concept in economics that demonstrates an inverse relationship between the rate of unemployment and the rate of inflation in an economy over the short term.