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_____ .
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Question

Quizplus · Accepted Answer

When the Fed decreases the money supply, interest rates rise, reducing investment and spending, which leads to lower demand in the economy. This results in a decrease in the price level and a decrease in real GDP in the short run.

If the Economy Is at Potential Output and the Fed