Question

Think of the simple quantity theory of money in an AD-AS framework. In that framework, an increase in the money supply will ____

a. shift the AS curve to the left.
b. shift the AD curve to the right.
c. shift the AD curve to the left.
d. shift the AS curve to the right.
e. b and d

Answer 1

In the AD-AS framework, an increase in the money supply leads to a rightward shift of the AD curve, representing increased aggregate demand due to more spending by consumers and businesses.

Step-by-step explanation:

In the context of the AD-AS (Aggregate Demand-Aggregate Supply) framework, an increase in the money supply typically leads to an increase in aggregate demand. According to the simple quantity theory of money, when more money is available within the economy, consumers and businesses have more to spend, which leads to a higher overall demand for goods and services. As a result, in the AD-AS framework, an increase in the money supply does not affect the AS curve directly; it primarily affects the AD curve, causing it to shift to the right.

This shift to the right reflects higher consumption and investment due to lower interest rates and increased lending capacity. It leads to a higher equilibrium quantity and potentially higher price levels in the economy. Therefore, this increase in the money supply is associated with expansionary monetary policy.