Refer to Figure 18.2.A decrease in the discount rate would most likely result in A)A decrease in the money supply and a move from AD₂ to AD₁. B)An increase in the money supply and a move from AD₁ to AD₂. C)A decrease in the money supply and a move from AS₂ to AS₁. D)An increase in the money supply and a move from AS₁ to AS₂.

Question

Quizplus · Accepted Answer

A decrease in the discount rate would encourage borrowing by banks from the central bank, which would increase the reserves of the banks and, consequently, the money supply in the economy. This would shift the aggregate demand curve to the right, leading to a move from AD₁ to AD₂.