Question

If the money supply is currently at MS1 and the central bank chooses to buy bonds, then the resulting short-run shift in the supply of savings (loanable funds) may be represented by a shift of the:

a. supply of loanable funds from S1 to S2 and a lower interest rate.
b. supply of loanable funds from S2 to S1 and a higher interest rate.
c. interest rate from r2 to r1.
d. money supply curve to MS2 that raises the interest rate.

Answer 1

(a) supply of loanable funds from S1 to S2 and a lower interest rate.

Step-by-step explanation:

When there is an increase in money supply (S1 to S2), interest rate will experience a decline, as there will be more available loanable funds, which will lower interest rate, as financial institutions, would want to attract customers with these lower interest rate.