Assume that the Federal Reserve increases the money supply. This will cause:
I. Interest rates to decrease
II. Consumption and investment to decrease
III. Inflation to fall

Question

Quizplus · Accepted Answer

When the Federal Reserve increases the money supply, there is more money available to borrow and lend. This increased supply of money will lead to a decrease in interest rates as borrowers will be willing to accept lower interest rates due to the abundance of funds available. However, as interest rates fall, consumption and investment may increase, not decrease. Also, increasing the money supply can lead to inflationary pressures rather than falling inflation, which makes option III incorrect. Therefore, only option I is correct.

Assume That the Federal Reserve Increases the Money Supply