Final answer:
The statement is True. Changes in the money supply can impact interest rates, the amount of loanable funds, real GDP, and price levels, influencing overall economic activity through monetary policy's control over the federal funds rate.
Step-by-step explanation:
Changes in the money supply indeed affect the interest rate through changes in the supply of loans, real GDP, the price level, and the expected inflation rate, which makes the statement True. An expansionary monetary policy, which increases the supply of money, typically lowers interest rates and increases the amount of loanable funds, facilitating more borrowing for consumption and investment. This can lead to higher aggregate demand, boosted real GDP, and potentially, depending on the economy's state, higher price levels and expected inflation.
Conversely, a contractionary monetary policy decreases the supply of money, raising interest rates and decreasing the amount of loanable funds, which dampens borrowing, decreasing aggregate demand, and can lead to lower real GDP and a tempering of price levels and inflation rates. These relationships underscore the significant impact that monetary policy has on various economic variables and the interplay between them.
Moreover, the federal funds rate, which is set by monetary policy and affects overnight borrowing amongst banks, influences other short-term and long-term interest rates due to changes in the supply and demand for loanable funds. Although the federal funds rate does not directly set other interest rates, substantial changes in this rate can lead to similar directional changes across the spectrum of interest rates offered in the financial markets, affecting consumer and business borrowing for items such as houses and cars.
The federal funds rate's influence on interest rates serves as a mechanism for controlling economic activity by increasing or decreasing aggregate demand. This level of control is vital for policymakers to either stimulate the economy during recessions or cool it down during overheated growth periods to maintain stability.