Using the liquidity-preference model, when the Federal Reserve increases the money supply,
A)the equilibrium interest rate decreases.
B)the aggregate-demand curve shifts to the left.
C)the quantity of goods and services demanded is unchanged for a given price level.
D)the long-run aggregate-supply curve shifts to the right.

Question

Quizplus · Accepted Answer

According to the liquidity-preference model, an increase in the money supply will lower the interest rate, as individuals and firms will have more money to lend, increasing the supply of loanable funds and lowering the cost of borrowing. This, in turn, will increase investment and consumption, leading to an increase in aggregate demand. Therefore, the correct answer is A.

Using the Liquidity-Preference Model, When the Federal Reserve Increases the Money