Question

which of the following best describes how expansionary monetary policy affects the aggregate demand curve in the aggregate demand�aggregate supply model?

Answer 1

Expansionary monetary policy influences the aggregate demand curve by increasing the money supply and lowering interest rates, stimulating spending and investment.

Step-by-step explanation:

This policy works by central banks, typically through open market operations, buying government securities or lowering the interest rates they charge banks. When interest rates decrease, borrowing becomes cheaper, encouraging businesses and consumers to take out loans for investments and spending. As a result, aggregate demand increases, causing the aggregate demand curve to shift to the right.

Lower interest rates not only incentivize borrowing but also make saving less attractive. As a consequence, consumers may prefer spending over saving, further contributing to increased aggregate demand. This shift in the aggregate demand curve can lead to higher output and employment levels in the economy.

Complete Question:How does expansionary monetary policy influence the aggregate demand curve in the aggregate demand–aggregate supply model?

Answer 2

Expansionary monetary policy affects the aggregate demand curve in the AD-AS model by decreasing interest rates, increasing investment and consumption, and potentially depreciating the currency. This shift leads to an increase in aggregate demand, resulting in higher output, employment, and inflation.

In the aggregate demand-aggregate supply (AD-AS) model, expansionary monetary policy affects the aggregate demand curve. Expansionary monetary policy involves actions by a central bank to increase the money supply and reduce interest rates in order to stimulate economic activity.

1. Interest Rates Decrease: By increasing the money supply and conducting open market operations, central banks aim to lower interest rates. Lower interest rates encourage borrowing and spending by businesses and consumers.
2. Increased Investment and Consumption: Lower interest rates make borrowing cheaper, leading to increased investment by businesses and higher consumption by households.
3. Currency Depreciation (Possibly): Lower interest rates can make a currency less attractive to investors, leading to a depreciation of the domestic currency.
4. Rising Aggregate Demand: The combined effects of increased investment, higher consumption, and, potentially, higher exports contribute to an overall increase in aggregate demand. As a result, the AD curve shifts to the right.

Therefore, in the AD-AS model, expansionary monetary policy leads to a rightward shift of the aggregate demand curve, reflecting an increase in overall spending in the economy. This shift can lead to higher output, employment, and potentially inflation, depending on the state of the economy.