What does an increase in the money supply lead to?
A) a decline in interest rates, an increase in investment, and an increase in aggregate demand
B) a decline in interest rates, a decrease in investment, and an increase in aggregate demand
C) a decline in interest rates, an increase in investment, and a decline in aggregate demand
D) an increase in interest rates, an increase in investment, and an increase in aggregate demand

Question

What does an increase in the money supply lead to?  
A) a decline in interest rates, an increase in investment, and an increase in aggregate demand 
B) a decline in interest rates, a decrease in investment, and an increase in aggregate demand 
C) a decline in interest rates, an increase in investment, and a decline in aggregate demand 
D) an increase in interest rates, an increase in investment, and an increase in aggregate demand

Quizplus · Accepted Answer

The increase in money supply leads to increased liquidity, which in turn leads to a decline in interest rates. This decline in interest rates makes borrowing cheaper, which encourages investment and consumption. The increase in investment and consumption leads to an increase in aggregate demand. Therefore, option A is the correct answer. Option B is incorrect because a decline in investment would lead to a decrease in aggregate demand, not an increase. Option C is incorrect because an increase in investment would lead to an increase in aggregate demand. Option D is incorrect because an increase in interest rates would discourage borrowing, leading to a decrease in investment and aggregate demand.

What Does an Increase in the Money Supply Lead To