If the FED implements a contractionary monetary policy under the dynamic model, the price level will _______ and GDP will ________ as compared to when the policy was not implemented. 单项选择题
A
decrease , decrease
B
increase, decrease
C
increase , increase
D
decrease, increase

Question

If the FED implements a contractionary monetary policy under the dynamic model, the price level will _______ and GDP will ________ as compared to when the policy was not implemented.

BlackTom AI · Accepted Answer

Contractionary monetary policy reduces the money supply (or slows its growth), which raises interest rates and lowers aggregate demand, so the price level falls and real GDP falls in the dynamic AD–AS framework.

1) Relevant knowledge points and concepts
- Money supply and interest rates: a smaller money supply → higher nominal and real interest rates.
- Investment and consumption sensitivity: higher interest rates reduce investment and interest-sensitive consumption.
- Aggregate demand (AD): AD = C + I + G + NX; lower I and C shift AD left.
- Short-run AD–AS dynamics: a leftward AD shift reduces the price level and output (real GDP) in the short run. In the long run output may return to potential, but the price level remains lower.

2) Step-by-step reasoning
- The FED implements contractionary policy → money supply (M) decreases.
- Money market response: with money demand roughly unchanged, the equilibrium interest rate (r) increases.
- Higher r → planned investment (I) falls and some consumption (C) falls.
- Lower I and C → aggregate demand (AD) curve shifts leftward.
- AD leftward shift → equilibrium moves to lower price level (P) and lower real GDP (Y) in the dynamic (short-run) model.

3) Intermediate logical steps (illustrative)
- M ↓ ⇒ r ↑
- r ↑ ⇒ I ↓, C (durables) ↓
- I ↓ and C ↓ ⇒ AD ↓ (shift left)
- AD ↓ ⇒ P ↓ and Y ↓ (short-run equilibrium)

4) Why the correct answer is correct
Because contractionary monetary policy operates by raising interest rates and reducing demand for goods and services; that reduction in aggregate demand directly lowers both the overall price level and real output compared to the no-policy case.

5) Why other options are incorrect
- "increase, decrease": contractionary policy does not raise prices; it lowers them.
- "increase, increase": contradicts theory—reducing money supply does not increase AD or output.
- "decrease, increase": contraction reduces demand, so GDP falls, not rises.

6) Conclusion
Therefore, the price level will decrease and GDP will decrease, matching the provided answer: "decrease , decrease."

If the FED implements a contractionary monetary policy under the dynamic model, the price level will _ and GDP will __ as compared to when the policy was not implemented. 单项选择题

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