Question

When the money market is drawn with the value of money on the vertical axis, an increase in the money supply shifts the money supply curve to the a. left, lowering the price level. b. left, raising the price level. c. right, lowering the price level. d. right, raising the price level.

Answer 1

The correct answer is option D.

Step-by-step explanation:

An increase in the money supply will lead to a rightward shift in the money supply curve. The interest rate will fall causing the cost of lending to decline. Consequently, the level of investment will increase

This will further cause the aggregate demand to increase. With the increase in demand, the price level will increase as well. Thus, an increase in the money supply has an inflationary effect on the economy.