Suppose the money supply increases.How is GDP affected?
A) GDP increases because the resulting increase in the interest rate leads to a decrease in investment.
B) GDP increases because the resulting decrease in the interest rate leads to an increase in investment.
C) GDP decreases because the resulting increase in the interest rate leads to a decrease in investment.
D) GDP decreases because the resulting decrease in the interest rate leads to an increase in investment.

Question

Suppose the money supply increases.How is GDP affected?  
A) GDP increases because the resulting increase in the interest rate leads to a decrease in investment. 
B) GDP increases because the resulting decrease in the interest rate leads to an increase in investment. 
C) GDP decreases because the resulting increase in the interest rate leads to a decrease in investment. 
D) GDP decreases because the resulting decrease in the interest rate leads to an increase in investment.

Quizplus · Accepted Answer

An increase in the money supply will result in a decrease in interest rates. This leads to increased borrowing and spending, which in turn increases aggregate demand and therefore GDP. Additionally, the decrease in interest rates makes it cheaper for businesses to access financing which increases investment, further contributing to an increase in GDP. Therefore, as per option B, GDP increases because the resulting decrease in the interest rate leads to an increase in investment.

Suppose the Money Supply Increases