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Effects of an announced future money supply decrease

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If the demand for money depends positively on real income and depends inversely on the nominal interest rate, what would happen to the price level today if the central bank announces (and people believe) that it will decrease the money growth rate in the future, but it does not change the money supply today?

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Solution Preview

In the future the money supply growth rate will decrease, so the price of money, i.e. the nominal interest rate, will increase. The demand for money varies ...

Solution Summary

This solution gives a 1-paragraph explanation of what would happen to the price level today if the central bank announced that it would decrease the money supply in the future.

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