Refer to the graph. If the initial equilibrium interest rate was 5 percent and the money supply increased by $100 billion, then the new interest rate would be
A) 1 percent.
B) 2 percent.
C) 3 percent.
D) 4 percent.

Question

Refer to the graph. If the initial equilibrium interest rate was 5 percent and the money supply increased by $100 billion, then the new interest rate would be
A) 1 percent. 
B) 2 percent. 
C) 3 percent. 
D) 4 percent.

Quizplus · Accepted Answer

An increase in the money supply would shift the LM curve to the right, causing an increase in output (Y) and a decrease in the interest rate (r). Using the graph, we can see that a $100 billion increase in the money supply would shift the LM curve from LM to LM'. This would cause the interest rate to decrease from 5 percent to 3 percent (point A to point B). Therefore, the answer is C.

Refer to the Graph