How does a reduction in money supply affect the aggregate demand curve?
A) The curve shifts leftward, lowering real GDP and the price level.
B) The curve shifts leftward, raising real GDP and the price level.
C) The curve shifts rightward, lowering real GDP but raising the price level.
D) The curve shifts rightward, raising real GDP and the price level.

Question

How does a reduction in money supply affect the aggregate demand curve?  
A) The curve shifts leftward, lowering real GDP and the price level. 
B) The curve shifts leftward, raising real GDP and the price level. 
C) The curve shifts rightward, lowering real GDP but raising the price level. 
D) The curve shifts rightward, raising real GDP and the price level.

Quizplus · Accepted Answer

A reduction in the money supply will increase the cost of borrowing and, consequently, reduce consumption and investment spending. This leads to a decrease in aggregate demand and a leftward shift of the AD curve, causing lower real GDP and a lower price level.

How Does a Reduction in Money Supply Affect the Aggregate