Multiple Choice
To combat wartime inflation, the U.S. government did all of the following except:
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1. Introduction to Macroeconomics
Introduction to Economics
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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.
Verified step by step guidance1
Understand the relationship between 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.
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.
Recognize that when output decreases, firms produce less and may reduce their workforce, leading to an increase in short-run unemployment.
Connect the decrease in money supply to the increase in short-run unemployment by noting that lower aggregate demand reduces production and labor demand.
Conclude that, in the short run, a decrease in the money supply is most likely to cause short-run unemployment to increase.
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