When the money supply declines by 10%,in the short run,output ________ and the price level ________.
A)is unchanged;is unchanged
B)declines;falls
C)is unchanged;falls
D)declines;is unchanged

Question

Quizplus · Accepted Answer

According to the Quantity Theory of Money, a decrease in the money supply would lead to a decrease in aggregate demand, which would cause a decline in output (real GDP) in the short run. However, the decrease in the money supply would also lead to less inflationary pressure, which would cause the price level to be unchanged or to fall slightly. Therefore, the correct answer is D - output declines and the price level is unchanged or declines slightly.

When the Money Supply Declines by 10%,in the Short Run,output