Question

If the economy starts at O, a decrease in the money supply moves the economy Group of answer choices

Answer 1

Answer: c. to Q in the long run.

Explanation:

A decrease in money supply will mean a decrease in the amount that households have for consumption. This will decrease Aggregate demand and force it to the left where it will then intersect with the SRAS at point R.

This will mean that the economy is in a recessionary gap as they are producing less than they can.

In the long run, the reduced economic activity will mean that some costs of factors of production like wages will be lower so more companies will hire labor and produce more which will increase the production in the economy.

This will move the SRAS curve to the right where it will intersect with the AD curve and the LRAS curve at point Q.