Figure 14-6
-Refer to Figure 14-6. If the money supply is increased in Panel (a) from MS₁ to MS₂, then in Panel (b) , the quantity of investment demanded

Question

Figure 14-6 -Refer to Figure 14-6. If the money supply is increased in Panel (a) from MS₁ to MS₂, then in Panel (b), the quantity of investment demanded

Quizplus · Accepted Answer

An increase in the money supply will lead to lower interest rates, as shown by the downward shift of the interest rate from r1 to r2 in Panel (a). This, in turn, will make investment less costly and more attractive, leading to an increase in the quantity of investment demanded, as shown by the shift of the investment demand curve from ID1 to ID2 in Panel (b). This will cause an increase in aggregate demand, shifting the AD curve to the right, as shown in Panel (c). As a result, output and the price level will increase, as shown by the rightward shift of the SRAS and LRAS curves in Panels (d) and (e), respectively. Therefore, the correct answer choice is B.