Answer:
Money supply increases causing the interest rate to decrease. investment spending will increase and the AD curve will shift to the right. price level however does not change.
Explanation:
Because the AS curve is horizontal there is a liquidity trap. During a liquidity trap, monetary policy is MOST EFFECTIVE. When money supply increases it causes an excess of money in the economy causing a drop(decrease) in the interest rate. The subsequent drop in the interest rate causes people to increase investment, which causes investment spending to rise(increase). This increase in investment spending causing the Aggregate Demand(AD) curve to move right. The price level does not change because the AS curve is horizontal and pegged at a given price level. So no matter the Demand the supply will only be at that constant price.
