As part of the "wealth channel of monetary policy," a higher money supply __________ interest rates and thus __________ bond prices.
A) raises; raises
B) raises; lowers
C) lowers; raises
D) lowers; lowers

Question

Quizplus · Accepted Answer

When a higher money supply is introduced into an economy, it increases the supply of money available for borrowing which reduces the demand for borrowing. This ultimately leads to a decrease in interest rates. As a result, bond prices will rise because as interest rates decrease, the value of existing bonds with higher interest rates increases, making them more attractive to potential buyers. Therefore, when the money supply is increased, bond prices increase also.

As Part of the "Wealth Channel of Monetary Policy," a Higher