Suppose there was an economic contraction caused by a shift in aggregate supply. Further, suppose the central bank changes the money supply to offset the effects of that contraction. How would the effects of the change in money supply be reflected in the aggregate demand and aggregate supply model?
A) aggregate supply would shift to the right.
B) Aggregate supply would shift to the left.
C) Aggregate demand would shift to the right.
D) Aggregate demand would shift to the left.

Question

Quizplus · Accepted Answer

When the central bank increases the money supply to counteract an economic contraction caused by a shift in aggregate supply, it lowers interest rates, making borrowing cheaper. This stimulates spending and investment, which shifts the aggregate demand curve to the right.

Suppose There Was an Economic Contraction Caused by a Shift