A slowdown in monetary expansion coupled with rising equilibrium interest rates forces the funds supply curve to shift _____________?
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Answer: C. up and to the left
Explanation
A slowdown in monetary expansion reduces money growth, and rising interest rates combine to shift the funds supply curve. Restricted monetary growth curtails the overall liquidity available for lending across the financial system. This scarcity of available capital forces the funds supply curve to shift upward and to the left. Monetary policy tightening by central banks directly constrains the rate of money supply growth. Supply curve contractions in financial markets are illustrated graphically as movements up and to the left. Higher interest rates naturally accompany a reduction in the available supply of loanable funds.
Down and to the left shifts do not correctly reflect the graphical impact of rising interest rates and monetary tightening. Down and to the right shifts indicate an expanding supply of funds, which contradicts monetary slowdowns. Up and to the right shifts represent increased capital availability rather than a contraction in monetary expansion.
- Subject
- Accounting and Finance
- Category
- Finance
- Topic
- —
- Difficulty
- medium
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