If the Federal Reserve increases the money supply, ceteris paribus, the:
A) rate of interest decreases.
B) rate of interest increases.
C) rate of interest is unaffected.
D) Fed sell bonds.

Question

Quizplus · Accepted Answer

When the Federal Reserve increases the money supply, the interest rate decreases. This is because an increase in the money supply leads to an increase in the supply of loanable funds. With more loanable funds available, lenders will lower their interest rates in order to entice borrowers to take out loans. This results in a downward shift in the demand for loanable funds curve, which causes the interest rate to decrease.

If the Federal Reserve Increases the Money Supply, Ceteris Paribus