An increase in the money supply is likely to reduce
A) the general price level.
B) nominal income.
C) money demand.
D) interest rates.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, an increase in the money supply leads to an increase in aggregate demand, which in turn leads to an increase in prices. As prices increase, interest rates also increase (as lenders demand higher returns to compensate for inflation risk), which reduces investment and slows down economic growth. Therefore, an increase in the money supply is likely to reduce interest rates.

An Increase in the Money Supply Is Likely to Reduce