According to the aggregate demand and aggregate supply model,in the long run a decrease in the money supply leads to
A)decreases in both the price level and real GDP.
B)an increase in real GDP and an increase in the price level.
C)a decrease in the price level but does not change real GDP.
D)an increase in the price level but does not change real GDP.

Question

Quizplus · Accepted Answer

In the long run, technology, capital and labor are fully adjusted and the economy operates at potential GDP. Therefore, a decrease in the money supply in the long run leads to a decrease in the price level as there is no impact on real GDP. This is because the downward pressure on prices resulting from the reduction in the money supply lead to lower costs of production and eventually lower prices. So, suppliers can sell their products at reduced prices without reducing their profits, and demanders can buy more goods and services as prices are lower.

According to the Aggregate Demand and Aggregate Supply Model,in the Long