If there is an autonomous decrease in spending (a leftward 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 decrease in spending, the aggregate demand curve will shift leftward, resulting in a decrease in real income. To hold real income constant, the Fed should increase the money supply, causing a rightward shift in the aggregate demand curve to counterbalance the leftward shift caused by the decrease in spending. This will bring the economy back to the original level of real income. Therefore, the answer is choice B, increase the money supply yielding a rightward shift in the aggregate demand curve.

If There Is an Autonomous Decrease in Spending (A Leftward