If the Fed ________ the money supply,the user cost of capital will ________ and V* will ________.

Question

Quizplus · Accepted Answer

When the Fed increases the money supply, it leads to a decrease in interest rates. As a result, the user cost of capital (which is the interest rate plus the depreciation rate) will also decrease. At the same time, the increase in the money supply can lead to an increase in V* (the desired level of real money balances) as people have more money to spend or invest. Therefore, the correct choice is B - increases; decrease; increase.

If the Fed ________ the Money Supply,the User Cost of Capital