Figure 34-2.On the left-hand graph,MS represents the supply of money and MD represents the demand for money;on the right-hand graph,AD represents aggregate demand.The usual quantities are measured along the axes of both graphs.
.
-Refer to Figure 34-2.If the money-supply curve MS on the left-hand graph were to shift to the left,this would
A)represent an action taken by the Federal Reserve.
B)shift the AD curve to the left.
C)create,until the interest rate adjusted,an excess demand for money at the interest rate that equilibrated the money market before the shift.
D)All of the above are correct.

Question

Figure 34-2.On the left-hand graph,MS represents the supply of money and MD represents the demand for money;on the right-hand graph,AD represents aggregate demand.The usual quantities are measured along the axes of both graphs.
. 
-Refer to Figure 34-2.If the money-supply curve MS on the left-hand graph were to shift to the left,this would
A)represent an action taken by the Federal Reserve. 
B)shift the AD curve to the left. 
C)create,until the interest rate adjusted,an excess demand for money at the interest rate that equilibrated the money market before the shift. 
D)All of the above are correct.

Quizplus · Accepted Answer

If the money-supply curve MS shifts to the left, it means that there is less money available in the economy. This shift could be caused by the Federal Reserve's monetary policy decisions. The decrease in the money supply would cause an increase in interest rates (assuming no change in the demand for money), which in turn would lead to a decrease in aggregate demand (AD) and a shift of the AD curve to the left. In the short run, the shift in MS would also create an excess demand for money at the interest rate that equilibrated the money market before the shift. Hence, all of the above statements are correct.