Answer to Question #286689 in Macroeconomics for Msb

Question

a) With the aid of a graph, show the effect of a reduction in money supply on the aggregate 

demand and supply in the short-run

Answer 1

The aggregate demand curve and the short run aggregate supply curve intersect at a point along the long run aggregate supply curve. The aggregate supply curve in the long run is usually vertical. The expense of living is increasing. A fall in aggregate demand will result from a reduction in money supply. The level of aggregate demand growth and short-run aggregate supply contraction can cause a country's real GDP to rise or fall. This component will take precedence if short-run aggregate supply declines more than aggregate demand grows, and the country's real GDP will fall, and vice versa.