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Which of the following will NOT occur if the money supply increases?Multiple choice question.Investment will increaseReal GDP will increaseInterest rates will increaseAggregate expenditure will increase

Question

Which of the following will NOT occur if the money supply increases?Multiple choice question.Investment will increaseReal GDP will increaseInterest rates will increaseAggregate expenditure will increase

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Solution

The option that will NOT occur if the money supply increases is "Interest rates will increase".

Here's why:

  1. Investment will increase: When the money supply increases, the amount of money that banks have to lend increases. This leads to a decrease in interest rates, making borrowing cheaper. As a result, businesses are more likely to take out loans to invest in their operations, leading to an increase in investment.

  2. Real GDP will increase: An increase in the money supply leads to an increase in spending. This increased spending stimulates the economy, leading to an increase in the production of goods and services, which increases real GDP.

  3. Interest rates will increase: This is the incorrect option. When the money supply increases, the cost of borrowing decreases because banks have more money to lend. This leads to a decrease in interest rates, not an increase.

  4. Aggregate expenditure will increase: When the money supply increases, consumers and businesses have more money to spend. This leads to an increase in aggregate expenditure.

This problem has been solved

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