If the economy is at potential output and the Fed decreases the money supply, in the SHORT run the price level will likely_____ and real GDP will likely_____ .

Question

Quizplus · Accepted Answer

In the short run, a decrease in the money supply leads to higher interest rates, reducing investment and consumption, which decreases aggregate demand. This results in a lower price level and a decrease in real GDP.

If the Economy Is at Potential Output and the Fed