1.Contractionary monetary policy causes a short-run _____ in interest rates in t

Question

1.Contractionary monetary policy causes a short-run _____ in interest rates in the short run and _____ in interest rates in the long run

increase: an increase, increase: no change, decrease: no change, or decrease, a decrease

2. Banks decide to do away with fees charged when other banks' customers use the bank's own ATM. If the money supply remains constant, interest rates will likely

decrease, increase, remains the same, or increase or decrease depending upon what maximizes profits for the largest commerical banks

3. Contractionary monetary policy causes _____ in the price level in the short run and _____ in the price level in the long run

no change: a decrease, a decrease: a decrease, a decrease: no change, or no change: no change

Explanation / Answer

1. Increase, no change.

In short run interest rate increases but comes back to original level due to simultaneous fall in the price level which increases real money balances.

2. Decrease

When banks get away with the given fee, demand for money falls which results in decrease in interest rate.

3. Decrease, decrease

Contractionary monetary policy reduces aggregate demand which results in decrease in price level . With fall in price, wage rate also falls which leads to increase in aggregate supply which decreases price even more.

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