In the aggregate demand-aggregate supply model in the short run,a decrease in the money supply is likely to cause a(n):
A)increase in both the price level and real GDP.
B)decrease in both the price level and real GDP.
C)increase in real GDP and a decrease in the price level.
D)decrease in real GDP and an increase in the price level.
E)increase in the price level only.

Question

Quizplus · Accepted Answer

A decrease in the money supply typically leads to higher interest rates, which reduces investment and spending. This decrease in spending causes both the price level and real GDP to fall in the short run, according to the aggregate demand-aggregate supply model.

In the Aggregate Demand-Aggregate Supply Model in the Short Run,a