Question

A change in the money supply will change investment when a. the money supply is a function of the price level. b. investment depends only on the level of GDP. c. investment is interest-sensitive. d. the supply for money is a function of the interest rate. e. investment is interest-insensitive.

Answer 1

C) investment is interest-sensitive.

Step-by-step explanation:

Investment is a function of the real interest rate. In Economics, this is expressed as:

I(r)

Where:

I = Investment

r = Real interest rate (which is equal to nominal interest rate minus expected inflation).

The higher the interest rate, the less is the quantity of investment, and the lower the interest rate, the more investment in an economy.

A change in the money supply affects interest rates. This is essentially the reason why the Fed exists in first place: to target a specific interest rate by increasing or decreasing the money supply.

If the Fed wants to raise the interest rate, it reduces the money supply, and if it wants to lower the interest rate, it increases the money supply.