Suppose the Bank of Canada decreases the money supply.What would be expected to happen to the aggregate demand curve and the aggregate supply curve?

Question

Quizplus · Accepted Answer

When the central bank decreases the money supply, it becomes more expensive for firms and individuals to borrow money. As a result, consumption and investment spending decrease, leading to a decrease in aggregate demand. This would cause the aggregate demand curve to shift leftward (or downward). At the same time, there would be no change in the short-run aggregate supply curve, which relies on the nominal wage rate and other input prices that are assumed to be sticky in the short run. Thus, the decrease in aggregate demand would lead to a movement along the short-run aggregate supply curve to a lower level of output and prices.

Suppose the Bank of Canada Decreases the Money Supply