A decrease in money supply (M) or a(n) __________ in velocity (V), will shift the aggregate...

A decrease in money supply (M) or a(n) __________ in velocity (V), will shift the aggregate demand to the left.

A. Increase

B. Decrease

Solutions

Expert Solution

Answer is option A ( increase)

According to the quantity equation of aggregate demand; MV=PY where M=money supply, V=velocity of the money, P= price level, Y= total output amount.
According to the equation, money supply is inversely related to velocity of the money. That is, when money supply decreases, velocity increases and vice versa. Hence A is the correct option.
Money supply is directly related to total output amount and price level.
Similarly velocity of the money is directly related to price level and total output amount.

Rahul Sunny answered 1 year ago

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