Question

If the central bank could manipulate money supply, it can move the aggregate demand curve higher...

If the central bank could manipulate money supply, it can move the aggregate demand curve higher or lower at will. True or false. Explain

Homework Answers

Answer #2

True  

  • While enacting contractionary monetary policy central bank decreases money supply, hence decrease consumer spending and thus aggregate demand curve shifts to the left. While enacting expansionary monetary policy opposite of the above is achieved to shift the aggregate demand curve to the right by increasing money supply in the economy.
  • But it should be kept in mind that central banks do not manipulate the money supply at their will, however, they do it whenever economy needs it. In other words, whenever a need arises according to the economic situation central banks decrease or increase money supply.
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