Question

Which of the following government policies will shift the aggregate demand curve to the left?

a. a decrease in the quantity of money
b. an increase in government purchases of goods and services
c. a decrease in taxes
d. a decrease in interest rates
e. an increase in government transfers

Answer 1

A decrease in the quantity of money will shift the aggregate demand curve to the left by decreasing consumption and investment due to higher interest rates.

Step-by-step explanation:

The government policy that will shift the aggregate demand curve to the left is a decrease in the quantity of money (option a). When the money supply is decreased, banks have less capital to lend, which leads to higher interest rates. This discourages borrowing and spending by both consumers and businesses. As a result, consumption and investment, which are critical components of aggregate demand, decrease, leading to a leftward shift of the aggregate demand curve.