Consider the exhibit below for the following questions.
Figure 33-4
-Refer to Figure 33-4.If the economy starts at A,a decrease in the money supply moves the economy
A)to A in the long run.
B)to C in the long run.
C)back to A in the long run.
D)to D in the long run.

Question

Consider the exhibit below for the following questions.
Figure 33-4 
-Refer to Figure 33-4.If the economy starts at A,a decrease in the money supply moves the economy
A)to A in the long run. 
B)to C in the long run. 
C)back to A in the long run. 
D)to D in the long run.

Quizplus · Accepted Answer

According to the exhibit, a decrease in the money supply moves the economy from point A to point C in the short run. However, in the long run, the economy adjusts and moves back towards potential output at point B. This is because, in the long run, prices and wages are flexible and can adjust to changes in the money supply, resulting in the economy returning to its long-run equilibrium. Therefore, the best choice is B as it reflects the eventual long-run adjustment of the economy.

Consider the Exhibit Below for the Following Questions