Holding everything else constant,an increase in the money supply causes
A) interest rates to decline initially.
B) interest rates to increase initially.
C) bond prices to decline initially.
D) both A and C of the above.
E) both B and C of the above.

Question

Quizplus · Accepted Answer

An increase in the money supply leads to an increase in bank reserves and excess reserves, causing an increase in the supply of loanable funds. This results in a lowering of interest rates (A). However, the increased supply of funds can lead to an increase in inflation expectations, which would cause bond prices to decline (C). Therefore, choice D is also partially correct, but not as accurate as choice A.

Holding Everything Else Constant,an Increase in the Money Supply Causes