the central bank of hamsterville and the government of hamsterville are trying to control inflation by…

the central bank of hamsterville and the government of hamsterville are trying to control inflation by engaging in contractionary monetary policy and contractionary fiscal policy, respectively. assume that the budget of hamsterville was balanced prior to engaging in contractionary fiscal policy. what will be the impact of contractionary fiscal policy and contractionary monetary policy on real gross domestic product(gdp) and the interest rate of hamsterville? choose 1 answer: a real gdp will decrease; interest rates will increase. b real gdp will decrease; impact on interest rates will be indeterminate. c real gdp will decrease; interest rates will decrease. d effect on real gdp will be indeterminate; effect on interest rates will be indeterminate. e real gdp will increase; interest rates will increase.

the central bank of hamsterville and the government of hamsterville are trying to control inflation by engaging in contractionary monetary policy and contractionary fiscal policy, respectively. assume that the budget of hamsterville was balanced prior to engaging in contractionary fiscal policy. what will be the impact of contractionary fiscal policy and contractionary monetary policy on real gross domestic product(gdp) and the interest rate of hamsterville? choose 1 answer: a real gdp will decrease; interest rates will increase. b real gdp will decrease; impact on interest rates will be indeterminate. c real gdp will decrease; interest rates will decrease. d effect on real gdp will be indeterminate; effect on interest rates will be indeterminate. e real gdp will increase; interest rates will increase.

Answer

Brief Explanations:

Contractionary fiscal policy (e.g., tax - hikes or spending cuts) reduces aggregate demand. Contractionary monetary policy (e.g., raising interest rates or reducing money supply) also reduces aggregate demand. Lower aggregate demand leads to a decrease in real GDP. The impact on interest rates is indeterminate as contractionary fiscal policy tends to lower interest rates (less government borrowing) while contractionary monetary policy tends to raise them (less money supply).

Answer:

B. Real GDP will decrease; impact on interest rates will be indeterminate.