Question

Suppose that the demand for money increases as people anticipate upcoming economic problems. to offset this increase in money demand, the fed should ______ the money supply, which would put ______ pressure on nominal interest rates.

Answer 1

The money supply should be increased. This will put downward pressure on nominal interest rates because there is more money circulating in the system. As more money is involved, there is less cost that goes along with holding the money, and the interest rate associated with it will fall.