Question

Suppose the federal reserve increases the money supply. In 3 or 4 sentences, explain the effects of this action on interest rates, consumption, investments, and Gross Domestic product

Answer 1

The effects would be different for all of them. Interest rates would go up because the value of the dollar would go down. More people would buy, but then we could experience a deflation. Less investments would be made because people would have more moola.

Cannot answer for GDP. I think you would really have to have a grasp on economics to understand this question. Deflation would definitely be an issue here, and the production of more money would only waste precious resources.

Answer 2

An increase in money supply will have the following effect:

• Decrease in Interest Rates
• Increase in Consumption
• Increase in Investments
• Increase in Gross Domestic Products

Step-by-step explanation:

An increase in Money Supply arises where the Federal Reserve is pursuing an expansionist push of the economy. It also means the Federal Reserve is increasing the amount of money in the economy. The major way of doing so is by buying back government bonds and treasury stocks.

Decrease in Interest Rates

The effect of this is that the supply of money to the Banks and other Financial intermediaries is increased. As a result, they[Banks] now have more money to lend their customers at a lower interest rate.

Increase in Consumption

Since firms and the general population now have increased access to loans, they tend to purchase, spend and consume more which leads to increase in consumption.

Increase in Investments

An increase in spending means firms have increased turnover and more excess capital and cash. They in turn will want to invest their excess funds.

Increase in Gross Domestic Products

A combination of all this factors in the economy accumulate in an increase in demand and nominal output of the economy. This results to an increase in the GDP.