If the Fed reduces the money supply by 5 percent and the quantity theory of money is true, then:

Question

Quizplus · Accepted Answer

According to the quantity theory of money, there is a direct relationship between the money supply and the price level in the economy. As the Fed reduces the money supply by 5 percent, the price level in the economy will decrease accordingly. This means that every point on the aggregate demand curve, which shows the relationship between the price level and the quantity of goods and services demanded, will move 5 percent to the left because consumers will demand less at the lower price levels. Therefore, the correct answer is A.

If the Fed Reduces the Money Supply by 5 Percent