When the Fed decreases the money supply:
A)aggregate demand and aggregate supply both increase.
B)aggregate demand increases,which leads to movement along the short-run aggregate supply curve.
C)aggregate demand decreases,which leads to movement along the short-run aggregate supply curve.
D)aggregate supply increases,which leads to movement along the aggregate demand curve.
E)aggregate supply decreases,which leads to movement along the aggregate demand curve.

Question

Quizplus · Accepted Answer

When the Fed decreases the money supply, it becomes more expensive for banks to lend money, which in turn makes it more difficult for businesses and consumers to borrow. This decrease in borrowing leads to a decrease in aggregate demand, which causes movement along the short-run aggregate supply curve. Therefore, aggregate demand decreases, which leads to movement along the short-run aggregate supply curve.

When the Fed Decreases the Money Supply