An increase in the money supply _____ the interest rate in the short run but _____ the interest rate in the long run.
A) lowers; does not affect
B) raises; lowers
C) does not affect; raises
D) does not affect; lowers

Question

Quizplus · Accepted Answer

An increase in the money supply lowers the interest rate in the short run due to the increased liquidity and availability of funds. However, in the long run, it does not affect the interest rate because the economy adjusts through mechanisms like inflation, changing the real interest rate back to its natural rate.

An Increase in the Money Supply _____ the Interest Rate