A decrease in the money supply sets the monetary transmission mechanism in motion which results in

Question

Quizplus · Accepted Answer

When the money supply decreases, it leads to an increase in the interest rate as there is a decrease in the amount of credit available. This rise in the interest rate results in a fall in the level of desired investment, as it becomes more expensive to borrow money. This fall in investment leads to a downward shift in the aggregate expenditure (AE) curve, as investment is a component of AE. Additionally, the lower level of AE leads to a leftward shift in the aggregate demand (AD) curve, as a lower level of spending will result in a lower level of output and prices. Therefore, option C is the correct answer.

A Decrease in the Money Supply Sets the Monetary Transmission