Question

1. An increase in the money supply does what to interest rates?

a.) raises them

b.) lowers them

c.) freezes them

d.) doesn't affect them

2.) If the nominal interest rate is 10 percent and inflation is 4 percent, the real interest rate is

a.) 6

b.) 10

c.) 14

d.) none of the above

3.)I posted an appropriate discussion for this section.

True

False

4.) Some economists believe that changes in the money supply may cause:

a.) inflation

b.) recession

c.) changes in investment

d.) All of the above

Answer 1

1)= An increase in the money supply lowers market interest rates, which makes it less expensive for the consumers to borrow.More the money flow in the economy less the interest rates will be and less money tends to higher rates.The reason why it lowers the interest rates is that,the finanacial institutions gets money which they later lend.and increase in money supply also increases the borrowing power of the consumers.

so, the correct answer is 'b' which is lowers them.

2)= In the question it is given that the nominal interest rate is 10 percent and the infliation is 4 percent.

the formula to calculate the real interest rate is,

real interest rate = nominal interest rate - infliation rate

  therefore, 10 - 4 = 6

so, the real interest rate is 6. i.e., option 'A'

3)= TRUE

4)= In any normal economy the money supply is linked to the inflation.if the money supply starts growing faster than economic output it causes inflation.it causes inflation because the number of goods are same but the money increased and now there is more money for same number of goods which leads the firms to put up the prices.

so,the change in money supplies may causes inflation. Therefore the correct answer is 'A'