If the economy is at potential output and the Fed decreases the money supply, run the price level will likely decrease in the short run.

Question

Quizplus · Accepted Answer

If the economy is at full potential output, a decrease in money supply will reduce aggregate demand and cause a short-term decrease in the price level. However, in the long run, this may lead to a decrease in potential output and the price level may return to its initial level.

If the Economy Is at Potential Output and the Fed