Explain the linkages in the causal chain when the Fed conducts a contractionary monetary policy. What will be the ultimate effect on GDP?

Contractionary monetary policy will require the Fed to either sell government securities, raise the required reserve ratio, or increase the discount rate. This will cause the money supply schedule to shift inward and raise the equilibrium level of the interest rate. This, in turn, will cause a decrease in the investment component of total expenditures and shift the total expenditure schedule downward. This will reduce the equilibrium level of real GDP. Also, contractionary monetary policy will cause the aggregate demand curve to shift inward and cause a reduction in the equilibrium price level. In the end, a contractionary monetary policy will lead to a lower equilibrium price level and a lower level of equilibrium real GDP.