Refer to the above information.An increase in the money supply of $20 billion will cause the equilibrium interest rate to:
A)fall by 4 percentage points.
B)fall by 2 percentage points.
C)rise by 4 percentage points.
D)rise by 2 percentage points.

Question

Refer to the above information.An increase in the money supply of $20 billion will cause the equilibrium interest rate to:
A)fall by 4 percentage points. 
B)fall by 2 percentage points. 
C)rise by 4 percentage points. 
D)rise by 2 percentage points.

Quizplus · Accepted Answer

According to the graph, an increase in the money supply shifts the money supply curve to the right and causes the interest rate to fall. The magnitude of the fall is determined by the slope of the LM curve. In this case, the LM curve is relatively flat, so a $20 billion increase in money supply will cause a 2 percentage point decrease in the equilibrium interest rate. Therefore, the answer is B.

Refer to the Above Information