How will an increase in an economy’s overall money supply impact aggregate demand?
An increase in the money supply will cause GDP to increase, which increases the amount of money consumers spend. When consumers have more money, they spend more, thus, the aggregate demand would increase. When times are good and you’re flush with cash, don’t you tend to let the good times roll and spend more money?
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How will a decrease in an economy’s overall money supply impact aggregate demand?
As the visual below illustrates, a decrease in the money supply results in a decrease to aggregate demand. When the money supply decreases, real GDP decreases, and consumers have less money to buy goods and services. When money becomes tight, most consumers cut discretionary spending (entertainment, dining out, retail purchases, etc.).