Suppose the economy is initially in long-run and short-run equilibrium. If the Fed decides to pursue a contractionary monetary policy, we will see
A) bond prices fall, interest rates fall, aggregate demand remains unchanged as consumption spending decreases, but investment spending increases. GDP remains constant in both the short run and the long run, but the price level falls in both.
B) bond prices fall, interest rates rise, aggregate demand falls as investment and consumption spending decrease, and real GDP and the price level decreasing in the short-run, but only the price level decreasing in the long run.
C) bond prices fall, interest rates rise, aggregate demand falls as investment spending decreases and consumption spending remains unchanged, and real GDP and the price level decrease in the short run, but only the price level falls in the short run.
D) interest rates rise but no change in bond prices. Aggregate demand falls as consumption spending and investment spending decrease, and the price level and real GDP fall in both the short run and the long run.
B
You might also like to view...
If a bank has more rate-sensitive assets than rate-sensitive liabilities
A) it reduces interest rate risk by swapping rate-sensitive income for fixed rate income. B) it reduces interest rate risk by swapping fixed rate income for rate-sensitive income. C) it increases interest rate risk by swapping rate-sensitive income for fixed rate income. D) it neutralizes interest rate risk by receiving and paying fixed-rate streams.
Suppose that the exchange rate between the U.S. dollar and the Mexican peso starts out at $0.12 per peso, and then changes to $0.09 per peso. The result will be that Americans will buy __________ pesos because Mexican goods become relatively __________ expensive
A) fewer; more B) fewer; less C) more; more D) more; less