Increase in money supply leads to a …………………in the interest rate for a given level of output, real money supply ………………
A. Increases, decrease
B. Decrease, increase
C. Increase, increase
D. Decrease, decrease
Answer : D. Decrease, decrease
Increase in money supply leads to a decrease in the interest rate for a given level of output, real money supply decreases.
The increase in money supply decreases the interest rate for a given level of output. For a very short period, at the given price level, the increase in money supply will increase the real money supply(nominal money supply / price level). The decrease in interest rate decreases the cost of borrowing capital and thus it increases the aggregate investment, consumers' bank loan etc. Over the time, the increase in money supply in an economy increases the inflation, i,e price level in the economy. As the price level rises, the real money supply falls.
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