If an economy experiences a decrease in the money supply, what is most likely to happen to short-run unemployment?

• A. Short-run unemployment will decrease.
• B. Short-run unemployment will remain unchanged.
• C. Short-run unemployment will increase.
• D. Short-run unemployment will fluctuate unpredictably.

Answer: (C)

Verified step by step guidance

1. Understand the relationship between the money supply and aggregate demand: A decrease in the money supply typically reduces aggregate demand because there is less money available for spending and investment.
2. Recall the short-run aggregate supply (SRAS) curve is upward sloping, so a decrease in aggregate demand leads to a lower output level and lower price level in the short run.
3. Recognize that when output falls below the natural level of output, firms produce less and may lay off workers, causing an increase in short-run unemployment.
4. Connect the decrease in aggregate demand due to the reduced money supply to the rise in short-run unemployment, as fewer goods and services are produced and fewer workers are needed.
5. Conclude that in the short run, a decrease in the money supply is most likely to cause short-run unemployment to increase.