Question

When the government implements monetary policy which component of Aggregate Demand are they hoping to change?

a) g

b) c

c) nx

d) i

Also if you can explain why that is the answer as well.

Answer 1

g is government expenditure.

c is private final consumption expenditure of households.

i is gross investment in the economy.

nx is net export.

There are three types of policy : fiscal policy ,monetary policy and exchange rate policy.

Under fiscal policy the government affects aggregate demand by changing it's expenditure or taxes. When government changes it's expenditure on goods and services it directly affects the component 'g' of aggregate demand. And when government changes it's taxes it affects disposable income of households which in turn affects their expenditure on goods and services. Hence taxes affects the ''c' component of aggregate demand.

Under monetary policy government affects aggregate demand by managing the money supply in the economy. Changing the money supply changes the interest rate which in turn affects the level of investment in the economy. Thus monetary policy affects the 'i' component of aggregate demand.

nx is the net export and it depends on the exchange rate which comes under exchange rate policy.

So the correct answer is option (d).