Question

To increase aggregate demand in the short-run, the Federal Reserve can

Question 3 options:

	decrease the money supply.
	increase the money supply.
	increase taxes.
	decrease taxes.

When the Federal Reserve decreases the money supply,

Question 2 options:

	the equilibrium interest rate increases.
	the aggregate-demand curve shifts to the right.
	the quantity of goods and services demanded is unchanged for a given price level.
	the short-run aggregate-supply curve shifts to the left.

Answer 1

1) Changes in taxes are part of fiscal policy and is not carried out by Federal Reserve. To increase aggregate demand in the short-run, the Federal Reserve can increase the money supply in the economy. When money supply increases, rate of interest will fall and as a result cost of borrowing reduces. This will induce investment in the economy and as a result aggregate demand increases. Hence the answer is option (b).

2) When the Federal Reserve decreases the money supply, there is less money available in the economy and this will lead to an increase in the equilibrium interest rate. As a result the aggregate demand curve shifts to the left. Hence the answer is option (a)