Question

Assume the economy is operating at less than full employment. An expansionary monetary policy will cause interest rates to ________, which will ___________ investment spending.

Answer 1

When the economy is not at full employment and an expansionary monetary policy is followed:

• Interest rates decrease
• Investment spending increases

When there is an expansionary monetary policy in place, more money is pumped into the economy which means that there are more loanable funds. This increase in the supply of loanable funds will decrease the interest associated with them.

As a result of interest rates being lower, more businesses and people will be able to borrow money and invest in projects thereby increasing investment spending.

In conclusion, there will be an increase in investment spending due to a decrease in interest rates.

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