How does central bank intervention in the money supply typically influence aggregate demand?

Central bank intervention in the money supply is a key tool used to influence overall economic activity, particularly aggregate demand. When a central bank decides to increase the money supply, it typically lowers interest rates, making borrowing less expensive for consumers and businesses. This increase in liquidity encourages individuals to take out loans for big-ticket items like homes and cars, and businesses to invest in expansion or capital projects.

As borrowing becomes more attractive, consumer spending rises, and business investments increase, leading to an overall increase in demand for goods and services in the economy. This uptick in spending is what drives the aggregate demand curve to shift to the right, representing a growth in total demand.

The other options do not accurately capture the relationship between money supply and aggregate demand. Contracting aggregate demand would occur in scenarios where the money supply is decreased or other restrictive monetary policies are enacted. Stating that central bank intervention has no impact on spending ignores the well-documented positive correlation between increased money supply and consumer/business behavior. Finally, while changes in the money supply can influence inflation rates, this is not the sole effect; the primary impact is on aggregate demand through borrowing and spending behavior. Thus, choice C accurately reflects how central bank monetary policy can stimulate economic activity through an increase in aggregate