ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -They believe that expansionary monetary policy increases the supply of loanable funds available through the banking system, causing interest rates to fall. With lower interest rates, aggregate expenditures on investment and interest‐sensitive consumption goods usually increase, causing real GDP to rise.

Detailed explanation-2: -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-3: -Nominal GDP tends to rise with the money supply, but this is not always the case. Real GDP–also referred to as “constant-price, ” “inflation-corrected” or “constant-dollar GDP–is an inflation-adjusted measure of a country’s GDP. Real GDP does not have as clear of a relationship with the money supply.

Detailed explanation-4: -Because real GDP is relatively constant over the short run, an increase in money supply increases aggregate demand, which increases prices. Over the longer term, an increase in the money supply will increase real GDP by increasing aggregate demand.

Detailed explanation-5: -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.