If the economy is at potential output and the Fed decreases the money supply, in the short run the price level will likely decrease.

Question

Quizplus · Accepted Answer

When the Fed decreases the money supply, it reduces the amount of money circulating in the economy, leading to a decrease in aggregate demand. As a result, businesses may reduce production and employment, causing a short-term decrease in output and prices. However, in the long run, the economy will adjust and return to its potential output level.

If the Economy Is at Potential Output and the Fed