47. (Problem 16b) In the short run, determine whether the following event causes

Question

47. (Problem 16b) In the short run, determine whether the following event causes a shift of a curve or a movement along a curve. Determine which curve is involved and the direction of the change. An increase in the quantity of money by the Federal Reserve increases the amount of money that people wish to lend, lowering interest rates. A. This results in a rightward shift of the long-run aggregate supply curve. B. This results in a leftward shift of the aggregate demand curve. C. This results in a rightward shift of the aggregate demand curve.

Explanation / Answer

Ans: Increase in money supply by the Fed will lead to a shift in the aggregate demand curve. It is a shift because it does not involve a change in price but it is because of a change in factors other than price i.e money supply.

Increase in money supply leads to a rightward shift in aggregate demand curve because increase in money supply leads to increase in income which in turn increases the quantity of goods demanded by people. Hence, a rightward shift of AD curve.

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