If there is an autonomous increase in spending (a rightward shift in the aggregate demand curve)and the Fed wishes to hold real income constant,then the Fed would:
A)decrease the money supply yielding a leftward shift in the aggregate demand curve.
B)increase the money supply yielding a rightward shift in the aggregate demand curve.
C)hold the money supply constant.
D)none of the above.

Question

Quizplus · Accepted Answer

If there is an autonomous increase in spending, this will cause an increase in aggregate demand. To hold real income constant, the Fed needs to counteract this increase by decreasing the money supply. This will cause a leftward shift in the aggregate demand curve, which will help to stabilize the economy and prevent inflation. Therefore, choice A is the best answer.

If There Is an Autonomous Increase in Spending (A Rightward