When the Fed decreases the money supply, _____
A) aggregate demand and aggregate supply both increase.
B) aggregate demand increases, which leads to a movement along the short-run aggregate supply curve.
C) aggregate demand decreases, which leads to a movement along the short-run aggregate supply curve.
D) aggregate supply increases, which leads to a movement along the aggregate demand curve.
E) aggregate supply decreases, which leads to a movement along the aggregate demand curve.

Question

Quizplus · Accepted Answer

When the Fed decreases the money supply, it decreases the amount of money available in the economy leading to a decrease in aggregate demand, which in turn leads to a movement along the short-run aggregate supply curve. This is because firms will reduce production in response to the decrease in demand, leading to a decrease in output and employment in the short run.

When the Fed Decreases the Money Supply, _____