Final answer:
The assumption that the money supply is fixed is true when locating a particular aggregate demand curve as aggregate demand is determined by various factors, including a constant money supply.
Step-by-step explanation:
When locating a particular aggregate demand curve, it is assumed that the money supply is fixed. The correct answer to the student's question is A. true. This is because aggregate demand (AD) represents the total spending on domestic goods and services at each price level, which is determined by a number of factors including the money supply. When economists draw an AD curve, they often do this ceteris paribus, meaning 'all other things being equal', which in this case includes keeping the money supply constant.
An increase in government spending shifts the AD curve to the right, raising both income and price levels. Conversely, a decrease in the money supply shifts the AD curve leftward, lowering income and price levels. Therefore, in the context of aggregate demand and aggregate supply models, the assumption of a fixed money supply is critical for predicting changes in real GDP and the price level.