Chapter 17, Problem 5MCQ

To determine

The question requires us to determine the government policies which shift the aggregate demand curve leftward.

Explanation of Solution

An increase in aggregate demand causes the curve to shift right. Aggregate demand curve shifts to the right due to the following changes:

1. Optimistic expectations of consumers and firms
2. An increase in wealth
3. An increase in the size of the existing stock of physical capital
4. Expansionary fiscal policy and monetary policy

A fall in the quantity of money represents the contractionary monetary policy in the economy, which causes the interest rate to increase in the market. A higher interest rate discourages investors and businesses from taking loans and thus, results in lower investment. A fall in investment causes the aggregate demand to fall and shifts it to the left.

Therefore, option “a” is correct.