An increase in the money supply, all else held constant, usually _____. increases the interest rate and increases aggregate demand decreases the interest rate and increases aggregate demand decreases the interest rate and decreases aggregate demand increases the interest rate and decreases aggregate demand
Question
An increase in the money supply, all else held constant, usually _____. increases the interest rate and increases aggregate demand decreases the interest rate and increases aggregate demand decreases the interest rate and decreases aggregate demand increases the interest rate and decreases aggregate demand
Solution
An increase in the money supply, all else held constant, usually decreases the interest rate and increases aggregate demand.
Here's why:
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When the money supply increases, there is more money available for businesses and individuals to borrow. This increase in supply, if not matched by an increase in demand for money (i.e., if all else is held constant), will lead to a decrease in the cost of borrowing, which is the interest rate.
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A decrease in the interest rate makes borrowing cheaper. This encourages businesses to invest more and individuals to spend more, both of which increase the overall demand for goods and services in the economy, known as aggregate demand.
So, in summary, an increase in the money supply, all else held constant, usually decreases the interest rate and increases aggregate demand.
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