If the money supply increases, then sm2 will shift to A) Sm3 and the interest rate will be 4%.
How to find the shift in money supply ?
When the money supply increases, the supply curve shifts to the right. In this case, it would move between Sm2 moving to Sm1 or Sm3.
If the money supply increases, it cannot shift to Sm1 because that represents a leftward shift, which would indicate a decrease in the money supply.
The shift must therefore be toward Sm3, which is to the right, indicating an increase in the money supply. When the money supply increases, the equilibrium interest rate typically decreases because more money is available to lend, and as supply goes up, the the interest rate goes down.
Therefore, the correct answer is that Sm2 shifts to Sm3 and the interest rate will be 4%.
The full question is:
In the graph, Dt is the transactions demand for money, Dm is the total demand for money, and Sm is the supply of money. The market is initially in equilibrium at a 6% interest rate. If the money supply increases, then Sm2 will shift to:
Question 19 options:
A) Sm3 and the interest rate will be 4%.
B) Sm1 and the interest rate will be 4%.
C) Sm1 and the interest rate will be 8%.
D) Sm3 and the interest rate will be 8%.