ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -An increase in the supply of money works both through lowering interest rates, which spurs investment, and through putting more money in the hands of consumers, making them feel wealthier, and thus stimulating spending.

Detailed explanation-2: -The price level is proportionally and directly related to the money supply; therefore, if there is an increase in the money supply by 25%, this will increase the economy’s price levels by 25%.

Detailed explanation-3: -An expansionary monetary policy will reduce interest rates and stimulate investment and consumption spending, causing the original aggregate demand curve (AD0) to shift right to AD1, so that the new equilibrium (Ep) occurs at the potential GDP level of 700.

Detailed explanation-4: -When the Fed increases the money supply, it lowers the interest rate and increases the quantity of goods and services demanded at any given price level, shifting aggregate-demand to the right.