Refer 10 Figure 19.2. A decrease in the discount rate would most likely result A

Question

Refer 10 Figure 19.2. A decrease in the discount rate would most likely result A decrease in the money supply and a move from AD2 to AD1. An increase in the money supply and a move from AD1 to AD2. A decrease in the money supply and a move from AS2 to AS1. An increase in the money supply and a move from AS1 to AS2. Refer to Figure 19.2. The sale of bonds by the Fed in the open market will rest A decrease in the money supply and a move from AD 2 to AD1. An increase in the money supply and a move from AD1 to AD2. A decrease in the money supply and a move from AS2 to AS1. An increase in the money supply and a move from AS1 to AS2.

Explanation / Answer

a. An increase in money supply and move from AS1 to AS2. This is because a decrease in discount rate, increases the level of borrowing and hence increases money supply.

b. A decrease in money supply and a move from AS2 to AS1. This is because when Fed sells the bonds, it takes money from the public and money supply becomes restricted.

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