Explain the impact of a decrease in the money supply in the short run and in the long run.

        The decrease in money supply will cause the increase in rate of interest that will eventually decrease investment spending in the economy leading to further decrease in other spending of consumers and this process keep going. Furthermore, the decrease in money supply will cause the decrease in quantity demanded of goods and services produced in economy at aggregate level of price. This process will ultimately cause leftward shift in aggregate demand curve.

    In the short run, if money supply decreases then both aggregate level of output and aggregate level of price also decrease causing fall in nominal wages and ultimately short run aggregate supply curve will be shifted rightwards.

    In the long run, if money supply decreases, then aggregate level of price also decreases, however aggregate level of output eventually backs to potential output. Furthermore, in the long run decrease in money supply does not impact the real GDP.