Assume that investment spending depends only on the interest rate and no longer depends on output. Given this information, an increase in money supply:

Question

Quizplus · Accepted Answer

An increase in money supply will cause a decrease in interest rates, which will in turn increase investment spending. Since investment spending depends only on the interest rate and not on output, an increase in money supply will directly lead to an increase in investment.

Assume That Investment Spending Depends Only on the Interest Rate