Suppose the Fed increases the money supply. As a result of this, people deposit excess funds into their bank accounts, causing banks to have excess reserves. As a result, the banks lower the interest rates that they charge on loans, and investment rises, causing an increase in aggregate spending. This is known as a(n)

Question

Quizplus · Accepted Answer

The scenario described is an indirect effect of monetary policy, where the initial increase in the money supply leads to a chain of events that ultimately impacts aggregate spending through changes in interest rates and investment. The other options are not relevant to the situation described.

Suppose the Fed Increases the Money Supply