32 - What happens as a result of aggregate demand and aggregate supply if the money supply decreases? A) Prices fall – output increases B) None C) Prices increase – output decreases D) Prices fall – production decreases E) Prices increase – production increases
32 - What happens as a result of aggregate
A)
B) None
C) Prices increase – output decreases
D) Prices fall – production decreases
E) Prices increase – production increases
A fall in the money supply leads to a fall in the lending capacity of the banks. This leads to a fall in the supply of money in an economy. This results in a fall in the availability of funds in the hands of consumers. This implies a lower level of consumption. Thus, it implies a fall in the aggregate demand that leads to a left shift of the AD curve from AD to AD". Now, a lower demand leads to lower production in an economy as producers slow down the production and results in a fall in the aggregate supply from AS to AS". Therefore, this leads to a fall in the price from P to P" and a fall in the output from Q to Q".
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