Question

Which of the following statements best describes the cause-and-effect chain of an expansionary monetary policy?

a. an increase in the money supply will raise the interest rate, decrease aggregate demand, and decrease real output.
b. an increase in the money supply will lower the interest rate, decrease aggregate demand, and increase real output.
c. a decrease in the money supply will raise the interest rate, decrease aggregate demand, and decrease real output.
d. an increase in the money supply will lower the interest rate, increase aggregate demand, and increase real output.
e. a decrease in the money supply will lower the interest rate, increase aggregate demand, and increase real output.

Answer 1

An expansionary monetary policy involves increasing the money supply to stimulate economic growth. It leads to a lower interest rate, increased aggregate demand, and higher real output.

Step-by-step explanation:

An expansionary monetary policy is a policy in which the central bank increases the money supply to stimulate economic growth.

The cause-and-effect chain of an expansionary monetary policy can be summarized as follows:

1. The central bank increases the money supply, which results in more money available for borrowing.
2. The increase in the money supply lowers the interest rate, as there is more supply of loanable funds. Lower interest rates make borrowing cheaper and more attractive for individuals and businesses, encouraging them to take loans.
3. The decrease in the interest rate stimulates borrowing for investment and consumption. With lower interest rates, businesses are more willing to take loans for investment projects, and consumers are more willing to take loans for big-ticket purchases like houses and cars.
4. The increase in borrowing for investment and consumption increases aggregate demand. When businesses invest and consumers spend more, it leads to an increase in aggregate demand, which is the total demand for goods and services in the economy.
5. The increase in aggregate demand results in higher real output. When aggregate demand increases, businesses respond by producing more goods and services, leading to an increase in real output or Gross Domestic Product (GDP).

Therefore, the statement that best describes the cause-and-effect chain of an expansionary monetary policy is choice d. An increase in the money supply will lower the interest rate, increase aggregate demand, and increase real output.