Figure 34-4. On the figure, MS represents money supply and MD represents money demand.
-Refer to Figure 34-4. 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

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. 
-Refer to Figure 34-4. 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.

Quizplus · Accepted Answer

When the Federal Reserve increases the money supply, the money demand curve will shift to the right, resulting in a lower interest rate (r2). As a result of the lower interest rate, there will be an increase in investment spending and consumption, leading to an increase in the equilibrium quantity of goods and services demanded (Y2). This is represented by the shift from MD to MD' and the movement from point A to point B on the figure. The price level (P1) remains constant in this scenario. Therefore, the correct choice is A.