A 5 percent reduction in the money supply will, according to most economists, reduce prices 5 percent:
A) in both the short and long runs.
B) in neither the short nor long run.
C) in the short run but lead to unemployment in the long run.
D) in the long run but lead to unemployment in the short run.

Question

Quizplus · Accepted Answer

According to most economic theories, a reduction in the money supply will decrease prices in the long run due to the Quantity Theory of Money, which posits a direct relationship between the amount of money in an economy and the level of prices of goods and services sold. However, in the short run, this reduction in the money supply can lead to higher unemployment rates as businesses adjust to the lower level of spending in the economy.

A 5 Percent Reduction in the Money Supply Will, According