ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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The money supply shifts right, the interest rate rises, investment decreases, and aggregate demand shifts left.
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The monet supply shifts right, the interest rate falls, investment increases, and aggregate
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the monet supplu shifts right, prices rise, spending fall, and aggregate demand shifts left
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the money supply shifts right, prices falls, spending increases. and aggregate demand shifts right
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Detailed explanation-1: -B. The money supply shifts right, the interest rate falls, investment increases, and aggregate demand shifts right.
Detailed explanation-2: -Monetary policy attempts to increase aggregate demand during recession by increasing the growth of the money supply. The theory of liquidity preference suggests that increasing the money supply will cause interest rates to fall. Lower interest rates cause higher investment spending which increases aggregate demand.
Detailed explanation-3: -There is an inverse relationship between the money supply and the interest rate. When the money supply is increased, the interest rate will fall. The lower interest rate will cause more borrowing, which will in turn increase the aggregate demand, leading to a rightward shift in the aggregate demand curve.
Detailed explanation-4: -Among the most important variables that can shift the demand for money are the level of income and real GDP, the price level, expectations, transfer costs, and preferences.
Detailed explanation-5: -An increase in the supply of money works both through lowering interest rates, which spurs investment, and through putting more money in the hands of consumers, making them feel wealthier, and thus stimulating spending. Business firms respond to increased sales by ordering more raw materials and increasing production.