According to the interest-rate-based monetary policy transmission mechanism, a d

ID: 1112396 • Letter: A

Question

According to the interest-rate-based monetary policy transmission mechanism, a decrease in the money supply will

A. lead to a decrease in investment spending and a decrease in real GDP which is greater than the decrease in investment spending.

B. lead to a decrease in investment spending and an increase in real GDP that is equal to the decrease in investment spending.

C. lead to an increase in investment spending and a decrease in real GDP which is greater than the increase in investment spending.

D. lead to an increase in investment spending and a decrease in real GDP that is equal to the increase in investment spending.

The right answer is option A.

A decrease in the money supply will raise the interest rate and lead to lower investment and lower real GDP.

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