Assume (other things constant) that the Fed increases the money supply. The mechanism through which aggregate demand increases is, according to interest-rate-based transmission mechanism, summarized as follows:
A) the money supply increases ? there is a drop in money balances held ? interest rates increase ? planned investment spending decreases ? aggregate demand increases.
B) increase in money supply ? increase in money balances held ? decrease in interest rates ? decrease in planned investment spending ? increase in aggregate demand.
C) increase in money supply ? decrease in money balances held ? decrease in interest rates ? increase in planned investment spending ? increase in aggregate demand.
D) increase in money supply ? decrease in interest rates ? increase in planned investment spending ? increase in aggregate demand.
D
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