Which of the following best describe the cause-effect chain of a expansionary mo
ID: 1198290 • Letter: W
Question
Which of the following best describe the cause-effect chain of a expansionary monetary policy? A decrease in the money supply will lower the interest rate, increase investment spending, increase aggregate demand and GDP. A decrease in the money supply will raise the interest rate, decrease investment spending, decrease aggregate demand and GDP. An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP. An increase in the money supply will lower the interest rate, decrease investment spending and increase aggregate demand and GDP.Explanation / Answer
The answer to this question is simple:
What is the effect of "expansionary monetray policy"?
Answer: When the Federal Reserve System looks at reducing unemployment it resorts to increasing money supply by expanding excess reserves in order to stimulate the economy.
The Federal Reserve System will have to action one or more of the following measures: i. Buy Securities ii. Reduce Reserve ratio iii. Reduce Discount rate
What is the effect of these measures:
The Fed takes steps to increase excess reserves, banks can make more loans increasing the money supply, which lowers the interest rate and increase in GDP.
Hence the most logical answer from the above 4 options is answer D.
D. Increase in money supply - lowers interest rate - increase aggregate demand and GDP.
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