If money demand is extremely sensitive to changes in the interest rate,the money demand curve becomes almost horizontal.If the Fed expands the money supply under these circumstances,then the interest rate will
A)fall substantially and investment and consumer spending will fall substantially.
B)rise substantially and investment and consumer spending will rise substantially.
C)fall substantially and investment and consumer spending will change very little.
D)change very little and investment and consumer spending will change very little.

Question

Quizplus · Accepted Answer

When the money demand curve is almost horizontal, it indicates that money demand is highly sensitive to changes in the interest rate, meaning even small changes in the money supply can bring the interest rate back to equilibrium without significantly altering it. Therefore, if the Fed expands the money supply under these circumstances, the interest rate and consequently investment and consumer spending will change very little.

If Money Demand Is Extremely Sensitive to Changes in the Interest