Which statement correctly describes the sequence that explains how an expansionary monetary policy impacts an economy?
A) The policy lowers interest rates; lower interest rates increase investment; and higher investment increases aggregate demand, which impacts output and the price level.
B) The policy lowers interest rates; lower interest rates discourage investment; and lower investment decreases aggregate demand, which impacts output and the price level.
C) The policy raises interest rates; higher interest rates reduce spending; and lower spending reduces aggregate demand, which impacts output and the price level.
D) The policy raises interest rates; higher interest rates attract more savings; and higher savings fuels investment growth, which raises aggregate demand, which impacts output and the price level.

Question

Quizplus · Accepted Answer

An expansionary monetary policy aims at increasing the money supply in the economy, which lowers interest rates. Lower interest rates, in turn, incentivize investment, leading to an increase in aggregate demand. An increase in aggregate demand eventually affects output and the price level, leading to economic growth. Option A correctly describes the sequence of events that occur in an expansionary monetary policy.

Which Statement Correctly Describes the Sequence That Explains How an Expansionary