Suppose that the Fed decides to decrease the money supply by 0.87 percent.If the velocity of money is constant, then the quantity theory of money predicts that:

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According to the quantity theory of money, MV = PY, where M is the money supply, V is velocity, P is the price level, and Y is real GDP. If the Fed decreases the money supply by 0.87 percent and velocity is constant, then M decreases by 0.87 percent. Holding all else constant, this will lead to a decrease in nominal GDP by 0.87 percent, as represented by the equation M*V = P*Y. Real GDP may or may not be affected, depending on whether the decrease in the money supply causes significant changes in the economy's productivity and efficiency.

Suppose That the Fed Decides to Decrease the Money Supply