In the portion of the aggregate supply curve that is upward-sloping, which of the following is most likely to occur if the Federal Reserve pursues monetary policy that reduces the money supply? A. The equilibrium price level and output will both increase.B. The equilibrium price level and output will both decrease.C. The equilibrium price level will decrease but output will stay the same.D. The equilibrium output will decrease but the price level will stay the same.
B. The equilibrium price level and output will both decrease.
In the portion of the aggregate supply curve that is upward-sloping, the most likely scenario if the Federal Reserve pursues monetary policy that reduces the money supply is that the equilibrium price level will decrease but output will stay the same.
An upward-sloping aggregate supply curve indicates that higher production costs result in higher prices. A reduction in the money supply will lead to an increase in interest rates, which will reduce investment spending and aggregate demand. The reduced aggregate demand would lead to a decrease in output levels. However, since the aggregate supply curve is upward-sloping, the decrease in demand would lead to lower prices, but the level of output would remain the same. Hence, option C is the correct answer.
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