Consider the following information about a hypothetical economy. This year, the

Question

Consider the following information about a hypothetical economy. This year, the real gross domestic product (GDP) is 500, the price level is 120, and the quantity of money is 6,000.


Suppose that the quantity of money increases by 2%. Which, if any, of the following statements is true in the aggregate supply-aggregate demand model for this economy?




A. We would see a leftward movement along the aggregate demand curve, with the price level rising by 2%.


B. The aggregate demand curve would shift leftward.


C. Aggregate demand would decrease.


D. We would see a rightward movement along the aggregate demand curve, with the price level falling by 2%.


E. None of these statements is true.


F. The aggregate demand curve would shift rightward.

Explanation / Answer

F. the aggregate demand curve would shift rightward. The increase in the quantity of money would reduce nominal interest rates, which would spur investment and consumption of large ticket items.

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