Answer to Question #180864 in Macroeconomics for Faisal

Question

How monetary and fiscal policy shift aggregate demand curve?

Answer 1

Expansionary monetary policy increases the money supply in an economy. Increase in the money supply will lead to an increase in consumer spending. This increase will shift the aggregate demand curve to the right.

Expansionary fiscal policy is used to kick-start the economy during a recession. It boosts aggregate demand which in turn increases output and employment in the economy. Since government spending is one of the components of aggregate demand, an increase in government spending will shift the aggregate demand curve to the right.