If the Fed expands the money supply by $1 trillion, what will happen in the money market?
A) The equilibrium interest rate will rise, and less money will be exchanged in equilibrium.
B) The equilibrium interest rate will fall, and more money will exchanged in equilibrium.
C) The equilibrium interest rate will not change.
D) None of the above.

Question

Quizplus · Accepted Answer

When the Fed expands the money supply by $1 trillion, it means that there is an increase in the supply of money. According to the law of supply and demand, an increase in the supply of money will lower the equilibrium interest rate, as lenders will have to compete for borrowers, resulting in lower rates. As a result, more money will be exchanged in equilibrium. Therefore, option B is correct.

If the Fed Expands the Money Supply by $1 Trillion