An increase in the money supply

Select one:

a. raises interest rates and shifts aggregate supply to the right.

b. reduces interest rates and shifts aggregate supply to the right

c. reduces interest rates and shifts aggregate demand to the right.

d. raises interest rates and shifts aggregate demand to the right.

Solutions

Expert Solution

An increase in the money supply in the economy will lead to a fall in the interest rate, resulting in an increase in investments in the economy since interest rate and investments are inversely related.

Since investment (I) is a component of Aggregate Demand and hence the GDP, it leads to a rightward shift in the AD curve.

Thus, an increase in the money supply results in an equal increase in nominal output, or Gross Domestic Product (GDP).

Ans. (C)

Rahul Sunny answered 1 year ago

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