Question

Which of the following is correct? 

a. An increase in the money supply causes the interest rate to decrease so that aggregate demand shifts right 

b. An increase in stock prices reduces consumption spending so that aggregate demand shifts left 

c. A recession in other countries reduces U.S. net exports so that U.S. aggregate demand shifts left. 

d. All of the above are correct.

Answer 1

Option D ie All are correct.

Option 1 is correct When the supply of money increases, financial institutions drop interest rates to motivate people to borrow. As a result aggregate demand increases causing the AD curve shifting right.

Option 2 is correct As per law of demand if price increases demand decreases. So, when price of stocks increase then aggregate demand falls, following law of demand. Thus aggregate demand curve shifts left showing the decrease.

Option 3 is correct Due to recession people will have low purchasing power. As a result demand for imported goods in the country that undergoes recession will fall, leading to a fall in exports of the US. All other things being unchanged a reduction in net exports reduces aggregate demand. As a result AD curve shifts left.