Question

An economy starts in a long-run equilibrium, but then a severe drought kills crops and dramatically increases the price of food. If the Federal Reserve wanted to stabilize the economy and return it back to full employment, it would

Group of answer choices

decrease the money supply, which woul restore the original pricel level

increase the money supply, but prices would forever be higher

increase the money supply, which woul restore the original pricel level

decrease the money supply, but prices would forever be lower

Answer 1

decrease the money supply, which would restore the original price level

Explanation: Lowering the money supply will lower demand and the price level will go back to the original level.