Principles of Economics, 7th Edition

Published by South-Western College
ISBN 10: 128516587X
ISBN 13: 978-1-28516-587-5

Chapter 34 - Part XII - The Influence of Monetary and Fiscal Policy on Aggregate Demand - Questions for Review - Page 766: 2

Answer

Decreasing the money supply would increase the interest rate in the market. This decrease in the money supply shifts the aggregate demand curve to the left.

Work Step by Step

The theory of liquidity preference explains the downward slope of the aggregate demand curve as well as how monetary and fiscal policy can shift this curve. As there is less money in the market, the interest rate increases. Less money goes into investments, keeping the interest rate higher.
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