Final answer:
When the Central Bank uses expansionary monetary policy, it increases the money supply and reduces interest rates, which shifts the aggregate demand to the right. Contractionary monetary policy does the opposite, and fiscal policy can also affect aggregate demand through spending and taxes. Correct option is 2)
Step-by-step explanation:
When the Central Bank uses expansionary monetary policy, aggregate demand shifts outward (to the right). This policy involves increasing the money supply, increasing the quantity of loans, reducing interest rates, and ultimately shifting the aggregate demand curve to the right. Actions like decreasing the reserve requirement for banks, lowering the discount rate, or purchasing government securities can be used to implement an expansionary policy.
Contractionary monetary policy has the opposite effect, reducing the money supply, increasing interest rates, and shifting aggregate demand to the left. This can be appropriate when inflationary pressures are present. Measures such as increasing the reserve requirements, raising the discount rate, or selling government securities are characteristic of a contractionary approach.
Fiscal policy is another tool, which involves adjustments in government spending or taxation. Expansionary fiscal policy, which may involve increasing government spending or cutting taxes, similarly seeks to shift aggregate demand to the right.