Question

Both monetary policy and fiscal policy affect aggregate demand.

Group of answer choices

True

False

Answer 1

True

Monetary policy affects aggregate demand by changing money supply and interest rates in the economy

If AD has to increase then central bank will employ expansionary monetary policy which will increase money supply in the economy by

1 reduction in discount rate

2 decrease in CRR

3 sale of securities in open market operations

This will induce liquidity in the economy and people with more currency will increase their demand

Inverse applies to when central bank wants to decrease AD by decreasing money supply

Fiscal policy also affects aggregate demand as follows

If govt want to increase AD then it will

1 decrease taxes

2 increase government spending

So that AD will increase because fiscal policy will help in increase the consumption, investment in the economy

When it wants to decrease AD then contractionay policies

Like increase in taxes, less spending, borrowings etc