According to proponents of the interest-rate-based monetary policy transmission mechanism, any increase in the money supply

Question

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Proponents of interest-rate-based monetary policy transmission mechanism argue that an increase in the money supply can increase Gross Domestic Product (GDP) only if interest rates fall and investment is sensitive to decreasing interest rates. This is because falling interest rates encourage firms to borrow and invest, which in turn increases spending and can lead to an increase in GDP. Option A is incorrect because an increase in the money supply can increase GDP even if the aggregate supply curve does not shift. Option C is incorrect because increasing the money supply does not necessarily cause velocity to increase. Option D is incorrect because falling interest rates alone may not necessarily move the economy out of a liquidity trap.

According to Proponents of the Interest-Rate-Based Monetary Policy Transmission Mechanism