According to the AS-AD model starting at the natural rate, if the central bank lowers the money supply, then equilibrium output and the equilibrium price level fall in the short run.

Question

Quizplus · Accepted Answer

In the AS-AD model, reducing the money supply leads to a higher interest rate, which decreases investment and shifts the aggregate demand curve to the left. This results in a lower equilibrium output and price level in the short run.

According to the AS-AD Model Starting at the Natural Rate