Hello! I cannot figure this out. I thought an increase in the money supply and a

Question

Hello! I cannot figure this out. I thought an increase in the money supply and an investment tax credit both would shift the AD to the right, but I read something and now I'm thinking that investment tax credit shifts it to the right and increase in the money supply would shift it to the left. Thank you!

Question:

An increase in the money supply....

a.

and an investment tax credit both cause aggregate demand to shift right.

b.

and an investment tax credit both cause aggregate demand to shift left.

c.

causes aggregate demand to shift right, while an investment tax credit causes aggregate demand to shift left.

d.

causes aggregate demand to shift left, while an investment tax credit causes aggregate demand to shift right.

a.

and an investment tax credit both cause aggregate demand to shift right.

b.

and an investment tax credit both cause aggregate demand to shift left.

c.

causes aggregate demand to shift right, while an investment tax credit causes aggregate demand to shift left.

d.

causes aggregate demand to shift left, while an investment tax credit causes aggregate demand to shift right.

Explanation / Answer

Tax credit means there would be more purchasing power in economic system or more demand. Now it will shift the aggregate demand to right

Further, if supply of money increases, it means now rate of interest will fall. Fall in interest rate leads to pick up in the investment activities and now more will be spent due to cheaper rate of interest. Thus, Aggregate demand shifts to right.

correct option (A)

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