Assume an economy with no international sector.

(a) Explain how a decrease in the money supply will affect interest rates.

(B) explain how the change in the interest rate you defined in part (a) will directly affect each of the three components of aggregate demand for this closed economy.

(C) explain how the change in interest rate you defined in part (a) Will affect each of the following in the short run

•output

• price level

A. A decrease in the money supply will lead to a decrees in nominal interests according to the money market graph.

B. Consumer spending, government spending, and investment spending will all decrease due to the higher interest rates. It is less favorable to spend. Because it is a closed economy, net exports will not be affected.

C1. The output of the economy will decrease because the aggregate demand shifted to the left.

C2. The price level of the economy will decrease because the aggregate demand shifted to the left.