Change in money supply and aggregate demand are directly
related to each other which is the main reason why any change in
the money supply shifts the aggregate demand curve.
When money supply Increases in the economy during expansion,the
interest rates in the economy gets lowered.
This will increase the income levels and ability of people to
purchase more goods and services which increases their demands for
the same.
Thus an increase in money supply shifts the aggregate demand
curve to the right due to an increase in the aggregate demand.
Similarly when the money supply decreases in the economy,
Interest rates start to rise, which decreases people's income and
ability to purchase goods and services.
This will lead to a decline in the aggregate demand and hence
the aggregate demand curve shifts to the left.