An increase in money supply causes the real interest rate to ________ and output to ________ in the short run,before prices adjust to restore equilibrium.
A)rise; rise
B)rise; fall
C)fall; rise
D)fall; fall

Question

Quizplus · Accepted Answer

An increase in money supply leads to a fall in the real interest rate as individuals and businesses demand more credit leading to lower borrowing costs. Lower interest rates encourage more borrowing and investment leading to increased output in the short run. Hence, the correct answer is option C: fall; rise.

An Increase in Money Supply Causes the Real Interest Rate