Figure 34-4.On the figure,MS represents money supply and MD represents money demand. -Refer to Figure 34-4.Suppose the current equilibrium interest rate is r₁.Let Y₁ represent the corresponding quantity of goods and services demanded,and let P₁ represent the corresponding price level.Starting from this situation,if the Federal Reserve increases the money supply and if the price level remains at P₁,then A)there will be an increase in the equilibrium quantity of goods and services demanded. B)there will be a decrease in the equilibrium quantity of goods and services demanded. C)there will be an increase in the equilibrium interest rate. D)fewer firms will choose to borrow to build new factories and buy new equipment.

Question

Quizplus · Accepted Answer

With an increase in the money supply, the MD curve shifts outward to the right, leading to a new equilibrium point at a lower interest rate (rS2U2B11S2U2B0). At this new equilibrium, the quantity of goods and services demanded increases (YS2U2B11S2U2B0>Y₁) as firms and consumers have more access to credit to finance investments and purchases. Therefore, choice (A) is the correct answer. There is no reason to believe that the equilibrium interest rate will increase, and while it is possible that some firms may choose to invest less, there is no evidence to support choice (D).