For each item below, identify whether it can cause a nation\'s aggregate demand

Question

For each item below, identify whether it can cause a nation's aggregate demand curve to shift from AD1to AD2 as shown in the graph. Can cause a shift from Will not cause a shift from AD1 to AD2 AD1 to AD2 AD Price Level The Federal Reserve An increase in the money supply. purchases bonds on the open market. AS AD An increase in the The central bank required reserve ratio. increases the discount rate The use of expansionary An increase in the nation's Real GDP monetary policy. resource endowment. An increase in the personal income tax rate

Explanation / Answer

An increase in the nominal money stock leads to a higher real money stock at each level of prices. In the asset market, the decrease in interest rates induces the public to hold higher real balances. It stimulates the aggregate demand and thereby increases the equilibrium level of income and spending.Thus, the aggregate demand curve shifts rightward in case of a monetary expansion.

Hence AD curve will shift right if money supply increases.

Also AD curve shifts right due to expansionary fiscal policy or reduction in taxes.

Can Cause a shift from AD1 to AD2

The federal reserve purchases bonds in the open market

The use of expansionary monetary policy

An increase in the money supplyAn increase in the nation's resource endowment. (It is believed to shift the AS curve as the country can produce more. This will make the country prosperous and inturn increase the aggregate demand)

Will not cause a shift from AD1 to AD2

An increase in the required reserve ratio

An increase in the personal tax rate.

The central bank increases the discount rate.

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