ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -An expansionary monetary policy will reduce interest rates and stimulate investment and consumption spending, causing the original aggregate demand curve to shift right to AD1, so that the new equilibrium occurs at the potential GDP level of 700.

Detailed explanation-2: -An expansionary monetary policy will shift the supply of loanable funds to the right from the original supply curve (S0) to the new supply curve (S1) and to a new equilibrium of E1, reducing the interest rate from 8% to 6%.

Detailed explanation-3: -Policymakers can influence aggregate demand with fiscal policy. An increase in government purchases or a cut in taxes shifts the aggregate-demand curve to the right. A decrease in government purchases or an increase in taxes shifts the aggregate-demand curve to the left.

Detailed explanation-4: -Expansionary fiscal policy occurs when the Congress acts to cut tax rates or increase government spending, shifting the aggregate demand curve to the right. Contractionary fiscal policy occurs when Congress raises tax rates or cuts government spending, shifting aggregate demand to the left.