Answer:
A. The real money supply to increase and interest rates to fall
Step-by-step explanation:
Generally speaking, the price level is the current price of goods, services produced in the country economy. It is very important aspect of economy that’s why has crucial effects on the indicators of Macroeconomics. Let’s research about the impacts on money supply and interest rates. Before all these, we could say that the rise or decrease in price levels is absolutely regulated by monetary policy.
We need to know what it is:
Monetary Policy: this is the process of how central bank or other equivalent authorities deal with governing the money supply, interest rates in the economy of the country. This policy will appear almost after happening of inflationary or expansionary gap.
Money Supply: is the total quantity or amount of the money which is circulating across the economy. It includes cash, coins, and balances held in checking and savings accounts or other near money substitutes.
Nominal Money Supply: Firstly, the nominal value of the good is the value in terms of money only. That’s why the Nominal Money Supply is just the supply of money nominally in certain time.
Real Money Supply: Again, the real value of the good is the compared value of the good rather than other goods, bundle of goods. Widely, The Real Money Supply is the value which is nominal supply but adjusted considering the inflation and macroeconomic effects.
Interest rate: is the amount of charging by the principal or lender to a borrower due to the usage of the assets. The interest rate is typically noted on an annual basis known as the annual percentage rate.
We can say that the price levels movements are certainly about the inflation that’s why we will consider the real value of money supply. When the price levels rise, the cost and the price of goods and services will increase. When the price level increase, the economy will undergo inflation then the monetary policy will let the increase in the interest rates and decrease the real money supply in the economy, and in turn, the aggregate demand will fall. However, if the price levels decrease, the monetary policy will let the increase the real money supply in order to increase the aggregate demand and decrease in the interest rates.
That’s why the decrease of the price levels will cause to increase on the real money supply and decrease on the interest rates respectively.