When Contractionary Monetary Policy Increases the Interest Rate, It Causes

question 74

Multiple Choice

When contractionary monetary policy increases the interest rate, it causes the price level to:

• A) decrease, and output to decrease.
• B) rise, and output to increase.
• C) decrease, and output to increase.
• D) rise, and output to decrease.

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Definitions:

Equilibrium Interest Rate

The interest rate at which the quantity of loanable funds demanded equals the quantity of loanable funds supplied.

Domestic Output

The total value of all goods and services produced within a country's boundaries over a specific time period.

Capital Goods

Physical assets that are used in the production process to manufacture goods and services, including buildings, machinery, and equipment.

Future Value

The value of an investment or asset at a specified future date based on assumed rates of growth or interest.