The indirect effect of an increase in the money supply is to

Question

Quizplus · Accepted Answer

An increase in the money supply leads to a decrease in interest rates, as banks have more money to lend out and competition among borrowers increases. Lower interest rates stimulate investment and consumption spending, as borrowing becomes less expensive. This increase in spending leads to an overall increase in aggregate demand. Therefore, B is the correct choice. A is incorrect since an increase in the money supply leads to lower, not higher, interest rates. C is partly correct, as an increase in the money supply does put more cash in people's pockets, but the indirect effect is the increase in aggregate demand through lower interest rates. D is incorrect as an increase in the money supply does not directly pay off any public debt.

The Indirect Effect of an Increase in the Money Supply