A decrease in the money supply causes
A) a long-run decrease in the level of output.
B) both a long-run and short-run decrease in the level of output.
C) a short-run decrease in the level of output.
D) no changes in the level of output.

Question

Quizplus · Accepted Answer

A decrease in the money supply causes a short-run decrease in the level of output because it reduces the amount of money available for spending and investment, leading to a decrease in aggregate demand. In the long run, however, the economy would adjust to the decrease in money supply by lowering prices and interest rates, restoring equilibrium, and returning output to its natural level.

A Decrease in the Money Supply Causes