ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -(a) In expansionary monetary policy the central bank causes the supply of money and loanable funds to increase, which lowers the interest rate, stimulating additional borrowing for investment and consumption, and shifting aggregate demand right.

Detailed explanation-2: -A larger money supply lowers market interest rates, making it less expensive for consumers to borrow. Conversely, smaller money supplies tend to raise market interest rates, making it pricier for consumers to take out a loan.

Detailed explanation-3: -Interest rates and inflation are inversely proportional. Low interest rates lead to people borrowing more from banks and saving less. This increases the supply of money in the economy and also the demand. As a result, prices of the commodities rise and cause inflation.

Detailed explanation-4: -When interest rates rise, it becomes more “expensive” to borrow money. That borrowed money would typically go toward consumer expenditures and capital investment, and so these two sectors diminish under higher interest rates. Therefore aggregate demand decreases, per the equation.

Detailed explanation-5: -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. Business firms respond to increased sales by ordering more raw materials and increasing production.