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Aggregate demand represents the total amount of goods and services demanded in an economy at a specific overall price level and within a given period. It's a crucial component that guides economists in understanding economic activity. When we talk about aggregate demand, it's important to view it as the sum of everyone's spending—consumers, businesses, and the government—as well as net exports.

Aggregate demand can shift due to various factors, such as changes in consumer confidence, investment spending, government policies, and, notably, the money supply.

When the money supply decreases, as posed in the original exercise, people effectively have less money to spend. Hence, aggregate demand decreases, moving the aggregate demand curve to the left on the AD-AS model. This leftward shift illustrates that, at any given price level, the quantity of goods and services demanded has decreased.

The AD-AS model stands for the Aggregate Demand - Aggregate Supply model. It’s a fundamental tool that combines aggregate demand and aggregate supply to depict economic equilibrium. By analyzing the interactions between aggregate demand (AD) and aggregate supply (AS) curves, economists can evaluate how economic policies and external factors influence the broader economy.

The downward-sloping aggregate demand curve shows the inverse relationship between the price level and the quantity of goods and services demanded. Conversely, the aggregate supply curve can be upward sloping in the short run but is typically vertical in the long run, reflecting the economy's natural level of output.

When aggregate demand drops due to a lower money supply, the AD curve shifts left. This shift results in a new equilibrium point on the AD-AS graph where output is lower, and if the economy has excess production capacity, prices may also fall.

Understanding the short-run and long-run effects of economic changes on output and prices is key to grasping broader economic dynamics. In the short run, a decrease in the money supply will reduce aggregate demand, leading to lower output and, often, lower prices as businesses adjust to maintain sales.

This short-run perspective highlights the immediate impact of reduced spending power, characterized by underutilized resources and economic slack. Firms are likely to respond by cutting back on production and possibly reducing prices.

In the long run, however, the economy is expected to adjust. Prices and wages are assumed to be flexible enough to bring the actual output back to the potential output, which is determined by factors like technology, labor, and capital. Over time, the lower prices and wages help increase aggregate demand, guiding the economy back to its full employment level of output. This is why, while short-run effects are pronounced in terms of output and price changes, the long-run scenario sees output returning to its natural, sustainable level, with prices remaining adjusted as per the shift in demand.