Aggregate demand will increase if the quantity of money _.
A) increases or tax rates decrease
B) or transfer payments decrease
C) remains constant or tax rates increase
D) decreases or tax rates increase

Question

Quizplus · Accepted Answer

According to the quantity theory of money, an increase in the quantity of money will lead to an increase in aggregate demand. This is because with more money in circulation, people have more purchasing power and can thus buy more goods and services, which in turn spurs economic activity. On the other hand, decreases in the quantity of money or increases in tax rates would lead to a reduction in aggregate demand, as people have less money to spend overall. Transfer payments are payments made by the government to individuals without any corresponding goods or services being exchanged, and so their effect on aggregate demand is more complex and depends on how the recipients of the payments choose to spend them.

Aggregate Demand Will Increase If the Quantity of Money _