If 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

If the Fed decreases the money supply, it means there is less money available for spending and lending, which leads to a decrease in aggregate demand. This decrease in aggregate demand leads to movement along the short-run aggregate supply curve. Therefore, the correct answer is C.

If the Fed Decreases the Money Supply