ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -(a) In expansionary monetary policy the central bank causes the supply of money and loanable funds to increase, which lowers the interest rate, stimulating additional borrowing for investment and consumption, and shifting aggregate demand right.

Detailed explanation-2: -Lower interest rates increases aggregate demand by stimulating spending. But it can take a while for the supply of goods and services to respond because more workers, equipment and infrastructure may be required to produce them.

Detailed explanation-3: -Central banks conduct monetary policy by adjusting the supply of money, usually through buying or selling securities in the open market. Open market operations affect short-term interest rates, which in turn influence longer-term rates and economic activity.

Detailed explanation-4: -The Fed can shift the aggregate demand curve when it changes monetary policy. An increase in the money supply shifts the money supply curve to the right. Without a change in the money demand curve, the interest rate falls. Falling interest rates increase the quantity of goods and services demanded.

Detailed explanation-5: -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.