Question

Assume an economy with no international sector.
(a) Explain how a decrease in the money supply will affect interest rates.
(B)explain how the change in the interest rate you defined in part (a) will directly affect each of the three components of aggregate demand for this closed economy.
(C) explain how the change in interest rate you defined in part (a) Will affect each of the following in the short run
•output
• price level

Answer 1

Answer:

A. A decrease in the money supply will lead to a decrees in nominal interests according to the money market graph.  

B. Consumer spending, government spending, and investment spending will all decrease due to the higher interest rates. It is less favorable to spend. Because it is a closed economy, net exports will not be affected.  

C1. The output of the economy will decrease because the aggregate demand shifted to the left.  

C2. The price level of the economy will decrease because the aggregate demand shifted to the left.  

Explanation:

Answer 2

Answer:A. According to the money market graph, a reduction in the supply of money would lead to a decrease in nominal interest.

B. Because of higher interest rates, household spending, government spending, and infrastructure spending would all decline. Spending is less desirable. Since it is a closed economy, it won't affect net exports.

C. The economy's production would decline as aggregate demand moves to the left.

If overall consumption moved to the left, the price level of the economy will decline.

Explanation:

Its on the answer