Question

If the domino effect occurs as a result of changes in the money supply, what will most likely happen as an immediate result of banks having more money to lend?

Answer 1

Answer

If the domino effect occurs due to changes in money supply,bank will immediate have more money to lend causing;

• Interest rates to reduce

• Investments rates to decrease

Explanation

The central banks apply different techniques to increase or reduce the funds in the banking system. This is called monetary policy. The FED influences the supply of money by modifying reserve requirements. They lower the reserve requirements to be able to loan more money which in turn increases overall money supply in the economy of the country. Through rising the bank’s reserves requirement, the Fed is able to lower the size of money supplying in the economy.

Answer 2

If the domino effect occurs as a result of changes in the money supply, investment rate and interest rate will decrease as an immediate result of banks having more money to lend.

Further Explanation:

According to the law of supply, an increase in the supply will decrease the price of the product. There is an inverse relationship between the price and supply of the product.

When the banks have more money to lend, their money supply increases. Therefore, they has to decrease cost of lending will decrease so that they can lend more funds to the public. The public would prefer to take a loan at a relative lower price. Therefore, decrease in the interest rate will increase the demand of the product. As the supply of the money has increased in the market, it will affect the investments. The investment rate will decrease because there are already a lot of funds in the market because of the increase in the supply.

Therefore, an increase in the money supply in the market will decrease the interest rate and investment rate.

Learn more:

1. Learn more about the law of demand and supply

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2. Learn more about the effect on demand

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3. Learn more about the demand and supply

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Answer details:

Grade: Senior School

Subject: Economics  

Chapter: Law of supply

Keywords:domino effect, result, changes, money supply, most, likely, happen, immediate, result, banks, money, lend.