Question

The direct effect of an increase in the money supply is ____

group of answer choices
a. people will spend the extra money, causing the aggregate demand curve to shift to the right, creating an increase in economic activity.
b. people will save more money, causing a decrease in economic activity and a fall in prices
c. people will save the money, causing an increase in bank deposits, causing interest rates to fall, and loans to expand.
d. people will spend the extra money, causing the aggregate demand curve to shift to the right and prices to rise, and causing the economy to go into recession

Answer 1

An increase in the money supply leads to more spending, not saving, which shifts the aggregate demand curve right and results in higher prices and real GDP in the short term, usually stimulating economic growth.

Step-by-step explanation:

The direct effect of an increase in the money supply is that people will spend the extra money, causing the aggregate demand curve to shift to the right and prices to rise. This is part of an expansionary monetary policy where the central bank increases the supply of money, typically resulting in lowered interest rates that encourage borrowing for investment and consumption. Contrary to causing a recession, this shift in aggregate demand can help close a recessionary gap by moving the economy towards higher real GDP and higher price levels in the short run.

An expansionary monetary policy aims to stimulate economic activity. When more money is available, consumers have more to spend, and businesses can invest more easily due to lower borrowing costs. Consequently, instead of leading to a decline in economic activity, the increase in money supply generally promotes economic growth, at least in the short term.