Which of the following correctly describes the cause-effect chain relationship t

Question

Which of the following correctly describes the cause-effect chain relationship through which a change in monetary policy affects the macroeconomy?

a. decrease in the money supply will decrease the interest rate which increases total spending and therefore the level of economic activity

b. an increase in the money supply increases the interest rate which reduces total spending and therefore the level of economic activity

c. an increase in the money supply reduces the interest rate which increases total spending and therefore the level of economic activity

d. a decrease in the money supply will increase the interest rate which increases total spending and therefore the level of economic activity

e. none of the above

Explanation / Answer

option C is correct.

when money supply increases- it leads to decrease in interest rates, lesser interest rates does not motives people to invest, they prefers to more consumption than investments. it leads to more spending on different sectors spending, so automatically the economic activities will also increase.

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