Figure 16-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 16-4. Suppose the current equilibrium interest rate is r₁. Let Y₁ represent the corresponding quantity of goods and services demanded, and let P₁ represent the corresponding price level. Starting from this situation, if the Federal Reserve increases the money supply and if the price level remains at P₁, then A) there will be an increase in the equilibrium quantity of goods and services demanded. B) there will be a decrease in the equilibrium quantity of goods and services demanded. C) there will be an increase in the equilibrium interest rate. D) fewer firms will choose to borrow to build new factories and buy new equipment.

Question

Quizplus · Accepted Answer

Increasing the money supply shifts the money supply curve to the right, causing the equilibrium interest rate to decrease (move from r₁ to rS2U2B11S2U2B0) and the equilibrium quantity of goods and services demanded to increase (move from Y₁ to YS2U2B11S2U2B0). This is because there is more money available in the market, lowering the cost of borrowing and increasing spending. The price level remains the same, so there is no impact on firms' borrowing decisions.