Which policy increases aggregate demand?

• A. Expansionary monetary policy
• B. Fiscal policy
• C. Productivity policy
• D. Monetary policy

Answer: (A)

Expanding monetary policy increases aggregate demand by stimulating spending and investment through cheaper borrowing. When the central bank lowers the policy rate or injects money into the economy, households and businesses face lower interest costs. This encourages more borrowing for big purchases and for business investment, boosting components of aggregate demand such as consumption and investment. Lower interest rates can also lead to a weaker currency, making exports more competitive and imports more expensive, which can further raise aggregate demand through net exports. In short, the mechanism works through the monetary transmission channel to push the aggregate demand curve to the right.

Productivity policy, by contrast, aims to raise the economy’s ability to produce over the long run, shifting the long-run supply rather than current demand. Fiscal policy can also raise aggregate demand via increased government spending or tax cuts, but the policy identified here specifically targets demand through monetary tools.