If the economy is at potential output and the Fed decreases the money supply, in the SHORT run the aggregate demand will likely:

Question

Quizplus · Accepted Answer

At potential output, the economy is already producing goods and services at their maximum capacity. If the Fed decreases the money supply, it reduces the availability of funds for investments and expenditures. As a result, people have less money to spend, causing a decrease in consumption and aggregate demand. This reduction in demand could lead to a decrease in prices, wages, and output in the short run. Therefore, the correct option is D) decrease.

If the Economy Is at Potential Output and the Fed