Question

A stock market boom would shift the aggregate demand curve to the

		Right.To offset this change, the Fed could increase the money supply.
		right. To offset this change, the Fed could decrease the money supply.
		left. To offset this change, the Fed could increase the money supply.
		left. To offset this change, the Fed could decrease the money supply.

Other things the same, if the Fed increases the money supply, the interest rate

		rises so aggregate demand shifts right.
		rises so aggregate demand shifts left.
		falls so aggregate demand shifts right.
		falls so aggregate demand shifts left.

Answer 1

right. To offset this change, the Fed could decrease the money supply. Stock market boom brings expansion in economy so AD shifts to the right and price level as well as real GDP are now higher than their long run levels. To bring them down a monetary contraction is necessary in terms of reduced money supply that shifts AD back

falls so aggregate demand shifts right. This is because rise in money supply forces the banks to generate more loans out of their excess reserves which then results in reducing the prime lending rates and other interest rates. This raises investment and so AD shifts rightwards.