Suppose that the Central Bank of the country of Keynesland decreases the supply of money; at the same time, the governmet of Keynesland passes a new investment tax credit. How would each policy affect the aggregate demand (AD) ? O A. The money supply decrease would shift the AD to the left; the new investment tax credit would shift AD to the right. B. Both events would shift the AD to the right. C. Both events would shift the AD to the left. D. The money supply decrease would shift the AD to the right; the new investment tax credit would shift AD to the left.

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Aidan

Business

20 July, 07:58

Suppose that the Central Bank of the country of Keynesland decreases the supply of money; at the same time, the governmet of Keynesland passes a new investment tax credit. How would each policy affect the aggregate demand (AD) ? O A. The money supply decrease would shift the AD to the left; the new investment tax credit would shift AD to the right. B. Both events would shift the AD to the right. C. Both events would shift the AD to the left. D. The money supply decrease would shift the AD to the right; the new investment tax credit would shift AD to the left.

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Turner Johnston · Answer 1

The correct answer is option A.

Explanation:

A reduction in the money supply implies a decrease in the availability of credit and hence decrease in the quantity of loanable funds. This will cause the aggregate demand to decrease.

This decrease in aggregate demand will cause the aggregate demand curve to move to the left.

A new investment tax credit will increase investment in capital goods. This will cause the aggregate demand to increase. Consequently, the aggregate demand curve will move to the right.