E Quiz: Asgmt 11 Chapter 27 Question 16 of 17 This example demonstrates the short-run neutrality of money. TH ΤΙ Initial

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E Quiz: Asgmt 11 Chapter 27 Question 16 of 17 This example demonstrates the short-run neutrality of money. TH ΤΙ Initially the money market and the goods market of a hypothetical economy are in equilibrium. The Central Bank in this economy pursues a contractionary monetary policy and decreases the money supply. The decrease in the money supply will create an impact on aggregate demand and the goods market through the monetary transmission mechanisn The reduction in the money supply will result in a rightward shift of the AD curve and create an inflationary gap in the economy. The equilibrium price level and the equilibrium level of output will fall in the short run. In the long run, factor prices will rise and the AS curve will shift to the left until the long-run equilibrium is reached.