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Figure: The Money Supply and Aggregate Demand
-(Figure: The Money Supply and Aggregate Demand) Refer to Figure: The Money Supply and Aggregate Demand. Panel (a) illustrates what happens when the Federal Reserve decides to _____ the money supply and _____ interest rates.
A) decrease; lower
B) increase; raise
C) increase; lower
D) decrease; raise

Question

Use the following to answer questions:
Figure: The Money Supply and Aggregate Demand 
-(Figure: The Money Supply and Aggregate Demand) Refer to Figure: The Money Supply and Aggregate Demand. Panel (a) illustrates what happens when the Federal Reserve decides to _____ the money supply and _____ interest rates.
A) decrease; lower 
B) increase; raise 
C) increase; lower 
D) decrease; raise

Quizplus · Accepted Answer

When the Federal Reserve decides to increase the money supply, it typically does so with the intention of lowering interest rates. This is because a larger supply of money reduces the cost of borrowing, which is reflected in lower interest rates.

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