The graph shown displays the relationship between money and the interest rate. If the money supply in the economy is currently at M^S2, and the Fed uses open market operations to move the money supply to M^S3, what is the overall effect on the economy? A) Aggregate demand decreases, causing GDP to fall. B) Aggregate supply decreases, causing GDP to fall. C) Aggregate demand increases, causing GDP to rise. D) The LRAS curve moves to the full employment level of output.

Question

Quizplus · Accepted Answer

Moving the money supply from M^S2 to M^S3 shifts the aggregate demand curve to the right, increasing GDP. This is because the increase in the money supply lowers the interest rate, stimulating investment and consumption spending. The LRAS curve is not affected by changes in the money supply, so option D is incorrect. Options A and B are also incorrect because there is no information in the graph to suggest a decrease in aggregate demand or supply.

The Graph Shown Displays the Relationship Between Money and the Interest