If the Fed increases the money supply,GDP
A)increases because the resulting increase in the interest rate leads to a decrease in investment
B)increases because the resulting decrease in the interest rate leads to an increase in investment
C)decreases because the resulting increase in the interest rate leads to a decrease in investment
D)decreases because the resulting increase in the interest rate leads to an increase in investment
E)decreases because the resulting decrease in the interest rate leads to an increase in investment

Question

Quizplus · Accepted Answer

When the Fed increases the money supply, it leads to a decrease in the interest rate. This decrease in interest rates makes borrowing cheaper, encouraging investment and increasing consumption. These factors increase aggregate demand, causing a rise in GDP. Therefore, GDP increases because the resulting decrease in the interest rate leads to an increase in investment.

If the Fed Increases the Money Supply,GDP