When the Fed increases the money supply
A)the interest rate rises and this stimulates consumption spending.
B)people spend less because they have more money.
C)the interest rate falls and this stimulates investment spending.
D)the interest rate rises and this stimulates investment spending.

Question

Quizplus · Accepted Answer

When the Fed increases the money supply, the interest rate falls. This happens because when there is more money in circulation, lenders have to offer lower interest rates in order to entice borrowers. This lower interest rate stimulates investment spending because it becomes cheaper for businesses and individuals to borrow money. Therefore, choice C is the correct answer.

When the Fed Increases the Money Supply