Question

In the short run, an unanticipated shift to a more restrictive monetary policy is most likely to result in

Answer 1

A restrictive or contractionary monetary policy in the short run leads to higher interest rates, decreased borrowing, lower aggregate demand, a lower price level, and reduced real GDP.

Step-by-step explanation:

In the short run, an unanticipated shift to a more restrictive monetary policy, often termed as contractionary monetary policy, is most likely to result in higher interest rates, discouraged borrowing for investment and consumption, and a subsequent leftward shift in aggregate demand. This shift typically leads to a lower price level and, in the short term, lower real GDP, as the central bank's actions work to decrease the supply of money and credit in the economy. According to the historical actions of the Federal Reserve over the past decades, such policies have been used to target the federal funds interest rate to control inflation and stabilize the economy.