Final answer:
An increase in money supply typically leads to a rightward shift in aggregate demand due to lower interest rates from expansionary monetary policy. This increase in aggregate demand results in a boost to economic activity and employment, but can lead to inflation if the economy is already at potential output.
Step-by-step explanation:
After an increase in money supply, the ultimate effect is typically an expansionary monetary policy outcome. This expansionary approach involves increasing the money supply, such as the Federal Reserve buying bonds, which in turn shifts the demand for loanable funds, and consequently, reduces interest rates. The decrease in interest rates is designed to stimulate investment by making borrowing more attractive and affordable for businesses and consumers.
As the interest rates fall, the lower cost of borrowing can lead to increased investment and consumption, which are major components of aggregate demand (AD). Therefore, following expansionary monetary policy, aggregate demand would likely shift to the right, which should result in an increase in overall economic activity, represented by a higher Gross Domestic Product (GDP) and employment levels. If the economy reaches its potential output, further expansionary policy would mainly result in inflation.
It's also important to note that an increase in money supply can affect demand curves for other goods and services, as well as impact international financial flows and trade balances. Ultimately, the aim of such fiscal measures is to close recessionary gaps and boost the economy, albeit with careful monitoring to prevent excessive inflation when the economy is at or near full capacity.