An increase in the money supply will have the greatest effect on real gross domestic product if the marginal propensity to consume is low A unemployment is very low B investment spending is not sensitive to changes in interest rates C the quantity of money demanded is not very sensitive to interest rates D the required reserve ratio is high.

Question

Melina Hoffman

Business

14 February, 00:42

An increase in the money supply will have the greatest effect on real gross domestic product if the marginal propensity to consume is low A unemployment is very low B investment spending is not sensitive to changes in interest rates C the quantity of money demanded is not very sensitive to interest rates D the required reserve ratio is high.

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Answers (1)

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Madelynn Jones · Answer 1

C the quantity of money demanded is not very sensitive to interest rates

Explanation:

Real GDP is the output of a country adjusted for inflation. In other words, real GDP is nominal GDP after accounting for inflation. An increase in real GDP will result from an increase in output after considering any increase in prices.

An increase in the money supply makes more money available for investments and consumption. An increase in the money supply may lead to a rise in the rate of inflation, and an increase in interest rates to counter inflationary pressures. An increase in interest rates makes credit expensive which discourages households and firms from borrowing. If the increase in the money supply does not result in high-interest rates, the firms and households will increase borrowing leading to an increase in consumption and investment spending.