Question

When the money supply decreases a.interest rates fall and so aggregate demand shifts right. b.interest rates rise and so aggregate demand shifts right. c.interest rates fall and so aggregate demand shifts left. d.interest rates rise and so aggregate demand shifts left.

Answer 1

Interest rates rise when the money supply falls, shifting aggregate demand to the left.

That is Option D.

When the money supply is reduced, what happens?

When the money supply is restricted, the interest rate rises, discouraging lending and investment. People save more when interest rates are higher, which affects private consumption.

A decline in aggregate demand growth results from lower consumption and investment. The money supply and interest rates are inversely proportional. A higher money supply lowers market interest rates, making borrowing more affordable for consumers.

A Smaller money supply, on the other hand, tends to raise market interest rates, making borrowing more expensive for consumers.

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