Answer :
Assume that the economy begins in long-run equilibrium. Then the Fed reduces the money supply. In the short run output decreases and prices are unchanged, whereas in the long run prices fall and output returns to its original level.
The money supply refers to the total amount of currency held by the public at any given time. There are several definitions of "money," the most common of which are currency in circulation and demand deposits.
The money supply is important because inflation will occur if the money supply grows faster than the economy's ability to produce goods and services. Furthermore, if the money supply does not grow quickly enough, it can lead to decreases in output, which can lead to an increase in unemployment.
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