Final answer:
Combining a contractionary monetary policy with an expansionary fiscal policy typically leads to an ambiguous effect on output, because the policies work in opposite directions on aggregate demand. The interest rate, however, is likely to increase as both policies can contribute to higher borrowing costs.
Step-by-step explanation:
When analyzing the effects of a contractionary monetary policy combined with an expansionary fiscal policy, we must consider the impact of each on the economy. A contractionary monetary policy typically involves the central bank reducing the supply of money and credit in the economy. This leads to an increase in interest rates, which discourages borrowing and investment, and ultimately shifts the aggregate demand to the left, causing a short-run decrease in real GDP and lower price levels.
On the other hand, an expansionary fiscal policy, which involves increased government spending and/or tax cuts, is designed to stimulate the economy and increase aggregate demand. This can lead to a short-run increase in real GDP. However, this could also potentially lead to higher interest rates, as the increase in government borrowing can put upward pressure on them.
Therefore, the combination of a contractionary monetary policy and an expansionary fiscal policy will likely result in an ambiguous effect on output due to the opposing forces on aggregate demand. Meanwhile, the interest rate could see an increase due to the expansionary fiscal policy's upward pressure on borrowing costs, although the contractionary monetary policy's effect on increasing interest rates is clear. To sum up, the answer would be an ambiguous effect on output and an increase in the interest rate.