Figure 21-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-4. Suppose the current equilibrium interest rate is r₁. Let Y₁ represent the corresponding quantity of goods and services demanded, and let P₁ represent the corresponding price level. Starting from this situation, if the Federal Reserve increases the money supply and if the price level remains at P₁, then A)there will be an increase in the equilibrium quantity of goods and services demanded. B)there will be a decrease in the equilibrium quantity of goods and services demanded. C)there will be an increase in the equilibrium interest rate. D)fewer firms will choose to borrow to build new factories and buy new equipment.

Question

Quizplus · Accepted Answer

An increase in the money supply shifts the MD curve to the right, resulting in a new equilibrium point with a lower interest rate (rS2U2B11S1U1B0). At the new equilibrium point, the quantity of goods and services demanded (YS2U2B11S1U1B0) exceeds the quantity demanded at the original equilibrium point (YS1U1B11S1U1B0), indicating an increase in demand for goods and services.