Assume (Other Things Constant) That the Fed Increases the Money

question 64

Multiple Choice

Assume (other things constant) that the Fed increases the money supply. The mechanism through which aggregate demand increases is, according to interest-rate-based transmission mechanism, summarized as follows:

• A) the money supply increases → there is a drop in money balances held → interest rates increase → planned investment spending decreases → aggregate demand increases.
• B) increase in money supply → increase in money balances held → decrease in interest rates → decrease in planned investment spending → increase in aggregate demand.
• C) increase in money supply → decrease in money balances held → decrease in interest rates → increase in planned investment spending → increase in aggregate demand.
• D) increase in money supply → decrease in interest rates → increase in planned investment spending → increase in aggregate demand.