Question

Which of the following shifts aggregate demand curve to the right?

An increase in the price level

An increase in the money supply

A decrease in the price level

A decrease in the money supply

Answer 1

An increase in money supply will shift the aggregate demand curve to the right.

As the money supply is increased in the economy, it basically increases the amount which is available with the public which they spend on their consumption. Aggregate demand is the sum of consumption spending, investment spending, government spending and net exports. As their is an increase in the amount of money in the economy, consumption spending increases as people now have more money which they can spend on goods and services. Also, as money supply is increased, it leads to a reduction in the rate of interest which further leads to an increase in investment and lending. Since the two components of aggregate demand that is consumption spending and investment spending increase, aggregate demand also increases which causes the aggregate demand curve to shift to right.