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In Exhibit 12, when the money supply increases from MS 1 to MS 2 the equilibrium interest rate a. remains unchanged. b. increases from i 2 to i 1 , increasing investment spending from I 1 to I 1 . c. increases from i 2 to i 1 , decreasing investment spending from I 2 to I 1 . d. decreases from i 1 to i 2 , increasing investment spending from I 1 to I 2 .
Economics For Today
Solutions
Economics For Today
In Exhibit 12, when the money supply increases from MS1 to MS2 the equilibrium interest rate
- a. remains unchanged.
- b. increases from i2 to i1, increasing investment spending from I1 to I1.
- c. increases from i2 to i1, decreasing investment spending from I2 to I1.
- d. decreases from i1 to i2, increasing investment spending from I1 to I2.
The impact on the equilibrium interest rate due to shift in the money supply.
Explanation of Solution
Money is anything that serves as a medium of exchange in the market, unit of account, and the store of value in the economy. There are many forms of money such as paper currencies, metallic coins, bills, and so forth. There are mainly three demands for money and they are speculative demand for money, precautionary demand for money, and transaction demand for money. The economic condition is illustrated as follows:
Option (d):
From the given diagram, it is identified that the money supply in the economy increases from MS1 to MS2, which is illustrated with a rightward shift in the money supply curve. As the money supply increases, the rate of interest in the economy decreases from i1 to i2. Since the relationship between the rate of interest and the investment increases, the fall in the rate of interest leads to an increase in the investment from i1 to i2. Thus, option 'd' is the correct answer.
Option (a):
The increase in the money supply in the economy leads to lower interest rate. This is because the increased supply of money reduces the scarcity of money, which decreases the rate of interest...
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