Refer to the diagrams. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve. All figures are in billions. If aggregate demand is AD3 and the monetary authorities desire to reduce it to AD2, they should

Decrease the money supply from $120 to $100

Explanation:

If the monetary authorities reduces aggregate demand from AD3 to AD2, money supply decreases from $120 to $100. This decrease will cause a decrease in consumer spending. There will be a reduction of price levels and real output.

This is also called contractionary monetary policy and it causes interest rate to be higher there by reducing investments.

Contractionary monetary policy is a type of economic policy that is been design to combat inflation which has to do with decreasing the supply money so that there will be an increase in the cost of borrowing which in turn make the GDP to decreases and inflations become dampens. The central bank and other monetary authorities reduces aggregate demand to AD2 from AD2 that it was, in turn, money in supply will decreases to $100 from that it was $120. This reduction will make a decrease in the way consumer spend. There will be a decrease in prices of commodities and output produced