Suppose that an economy is initially producing at the full-employment level of output. Now suppose there is a reduction in the money supply. Other things being equal we can expect
A) supply-side inflation.
B) demand-side inflation.
C) cost-pull inflation.
D) deflation.

Question

Quizplus · Accepted Answer

A reduction in the money supply will lead to a decrease in aggregate demand, causing firms to decrease production and in turn causing a decrease in prices (deflation). This is known as demand-side deflation.

Suppose That an Economy Is Initially Producing at the Full-Employment