Brief Principles of Macroeconomics (MindTap Course List)
Brief Principles of Macroeconomics (MindTap Course List)
7th Edition
ISBN: 9781285165929
Author: N. Gregory Mankiw
Publisher: Cengage Learning
Question
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Chapter 16, Problem 1QCMC
To determine

Relation between money supply and aggregate demand.

Expert Solution & Answer
Check Mark

Answer to Problem 1QCMC

Option ‘b’ is correct.

Explanation of Solution

Option (b):

By the theory of liquidity preference, an increase in the money supply shifts the money supply curve to the right causing the equilibrium interest rate to decrease. This stimulates consumption and investment, thereby expanding aggregate demand. Thus, option ‘b’ is correct.

Option (a):

Increase in money supply shifts the money supply curve to the right, which lowers the interest rate. Thus, option ‘a’ is incorrect.

Option (c):

By the theory of liquidity preference, a decrease in money supply shifts the money supply curve to the left causing the equilibrium interest rate to increase. This reduces consumption and investment, thereby contracting aggregate demand. Thus, option ‘c’ is incorrect.

Option (d):

Decrease in money supply shifts the money supply curve to the left, which increases the interest rate. Thus, option ‘d’ is incorrect.

Economics Concept Introduction

Concept introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period.

Money supply: Money supply refers to the total amount of monetary assets circulating in an economy during a particular period.

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