1 If the Federal Reserve wants to maintain a constant intere

1.. If the Federal Reserve wants to maintain a constant interest rate, following an increase in money demand, the Fed must ________ (increase/decrease) money supply

2. A lower interest rate will shift aggregate demand to the ______ (right/left)

3. A higher interest rate will reduce investment and _________

4. The concern of a large, permanently increase in the money supply is faster _______

5. The money supply line is _______, because it is set by the Federal Reserve

Solution

if the Federal reserve want to keep the constant interest rate, following an increase in the money demand, the Fed must increase the money supply. In times of high money demand people prefer to hold more cash in hand so if there is an increase in the money supply it would lower the interest rate in the economy.

The lower interest rate will shift the aggregate demand curve to the right, when the interest rate is low the cost of borrowing money is less so people borrow more money and invest and consume out of it and this will increase the aggregate demand and the AD curve will shiifts to the right.

A higher interest rate will reduce the investment and consumption spending in the economy.

When there is higher interest rate the cost of borrowing money is high so the individuals and the business will borrow less and this will negatively affect the investment and consumer confidence.

The concern of a large permanent increase in the moneysupply is faster inflation. If the money supply increase is greater than the real GDP, there should be obvious inflation.

The money supply line is vertical.

This money supply fixed by the central bank of a country.