Would an increase in the nominal interest rate cause the AD curve to shift to the left?
if the reason the Fed increases interest rates is due to an increase in inflation, then it's just an upward movement along an AD curve. If the Fed raises real interest rates at any given level of inflation, then the AD curve shifts left. As I mentioned in class, this is the hardest part of the model. Under normal circumstances, the Fed reacts endogenously to inflation. If that's the case, then that's what the AD curve shows, so it's just a movement along the AD curve. The Fed, however, can also respond exogenously by changing interest rates for a reason other than a change in inflation. If that's the case, then the AD curve shifts.