Which of the following best describes the cause-effect chain of an expansionary monetary policy?
A) A decrease in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.
B) A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.
C) An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.
D) An increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.

Question

Quizplus · Accepted Answer

An expansionary monetary policy involves increasing the money supply, which will lower the interest rate through an increase in the supply of loanable funds. This lower interest rate will encourage investment spending by businesses and individuals, which will then increase aggregate demand and GDP. Therefore, the correct cause-effect chain is that an increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.

Which of the Following Best Describes the Cause-Effect Chain of an Expansionary