Which sequence of events correctly describes the effects of an expansionary monetary policy?

Show Answers

Aggregate output rises, leading to higher money demand, which causes interest rates to climb and planned investment to grow.An increase in the money supply lowers interest rates, boosting planned investment, which then raises aggregate output and increases money demand.The money supply expands, causing interest rates to rise, which stimulates planned investment, resulting in higher aggregate output and increased money demand.Money demand grows, lowering interest rates, which reduces planned investment, but aggregate output and money demand still increase.None of the above sequences accurately represent the process.

Explanation

Expansionary monetary policy raises the money supply, which reduces interest rates. Lower interest rates encourage more planned investment, leading to an increase in aggregate output. As output grows, money demand also rises. Therefore, the correct chain is an increased money supply, decreased interest rates, increased investment, higher output, and greater money demand.