If the economy is at potential output and the Fed decreases the money supply, in the short run the likely result will be a decrease in investment and a decrease in consumption.

Question

Quizplus · Accepted Answer

When the Fed decreases the money supply, it can lead to an increase in interest rates, which can cause a decrease in investment and consumption. This is because higher interest rates make borrowing more expensive, which reduces the incentive for businesses to invest and for households to consume. In the short run, these effects are likely to be more pronounced as businesses and households may not have time to adjust their plans in response to the monetary policy change.

If the Economy Is at Potential Output and the Fed