If the economy is at potential output and the Fed decreases the money supply, in the SHORT run the likely result will be a(n) _____ in investment and a(n) _____ in consumption.

Question

Quizplus · Accepted Answer

If the economy is at potential output and the Fed decreases the money supply, it will lead to an increase in interest rates, which will decrease investment as the cost of borrowing money increases. In addition, the decrease in money supply will reduce consumer spending power, leading to a decrease in consumption. Therefore, the most likely result in the short run will be a decrease in investment and a decrease in consumption.

If the Economy Is at Potential Output and the Fed