What is the immediate and longer-term effect of a decrease in the money supply?
A) A decrease in the money supply creates an excess supply of money that is eliminated by rising prices.
B) A decrease in the money supply creates an excess supply of money that is eliminated by falling prices.
C) A decrease in the money supply creates an excess demand for money that is eliminated by rising prices.
D) A decrease in the money supply creates an excess demand for money that is eliminated by falling prices.

Question

Quizplus · Accepted Answer

A decrease in the money supply creates an excess demand for money as individuals and businesses will have less money to spend. This excess demand for money can only be eliminated by falling prices, which reduces the amount of money needed to purchase goods and services. In the longer-term, a decrease in the money supply can also lead to a decrease in economic activity and higher unemployment as businesses have less money to invest and hire workers.

What Is the Immediate and Longer-Term Effect of a Decrease