Specifically, when a short run AS curve is positive, how does a decrease in money supply affect price levels and Real GDP in the short run?

Thank you!


Real GDP

A household with an income of $10,000 per month is likely to demand a larger

quantity of money than a household with an income of $1,000 per month. That relationship suggests that money is a normal good: as income increases, people demand more money at each interest rate, and as income falls, they demand less.

An increase in real GDP increases incomes throughout the economy. The demand for money in the economy is therefore likely to be greater when real GDP is greater.

The Price Level

The higher the price level, the more money is required to purchase a given quantity of goods and services. All other things unchanged, the higher the price level, the greater the demand for money. https://open.lib.umn.edu/principleseconomics/chapter/25-2-demand-supply-and-equilibrium-in-the-money-market/

  • $\begingroup$ So Real GDP decreases and the price level decreases when the money supply decrease, correct? $\endgroup$ – Michael May 6 '18 at 16:37

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