Question

An increase in the money supply leads to a(n) a) Decline in interest rates, a decrease in investment, and an increase in aggregate demand b) Decline in interest rates, an increase in investment, and a decline in aggregate demand c) Decline in interest rates, an increase in investment, and an increase in aggregate demand d) Increase in interest rates, an increase in investment, and an increase in aggregate demand

Answer 1

Option C i.e Decline in interest rates, an increase in investment and an increase in aggregate demand is the correct answer.

When there is more money supply, there would be more money for borrowing which ultimately reduces the interest rate. similarly when there is more money supply, the people and firms would hold more money and thus spend and invest more which finally increases aggregate demand.