If money demand is extremely sensitive to changes in the interest rate, the money demand curve becomes almost horizontal.If the Bank of Canada expands the money supply under these circumstances, then the interest rate will
A)fall substantially and investment and consumer spending will fall substantially.
B)rise substantially and investment and consumer spending will rise substantially.
C)fall substantially and investment and consumer spending will change very little.
D)change very little and investment and consumer spending will change very little.

Question

Quizplus · Accepted Answer

When the money demand curve is almost horizontal, it indicates that money demand is highly sensitive to changes in the interest rate, meaning even small changes in the money supply can bring the interest rate to its equilibrium level without significantly altering the interest rate itself. Therefore, if the Bank of Canada expands the money supply under these circumstances, the interest rate and consequently investment and consumer spending would change very little.

If Money Demand Is Extremely Sensitive to Changes in the Interest