If a central bank decreases the money supply in response to an adverse supply shock,which of the following does its response move back closer to its value before the shock?

Question

Quizplus · Accepted Answer

When the central bank decreases the money supply in response to an adverse supply shock, it leads to a decrease in demand, which would result in a decrease in both the price level and output. However, by decreasing the money supply, the central bank is essentially reversing the inflationary pressures created by the adverse supply shock. Therefore, the response of the central bank would move the price level back towards its value before the shock, but it may not necessarily move output back to its previous level. Thus, the correct choice is B, the price level but not output.

If a Central Bank Decreases the Money Supply in Response