Question

Other things the same, a decrease in the price level motivates people to hold a. less money, so they lend less, and the interest rate rises. b. less money, so they lend more, and the interest rate falls. c. more money, so they lend more, and the interest rate rises. d. more money, so they lend less, and the interest rate falls.

Answer 1

Answer: Option (b) is correct.

Explanation:

Correct option: Less money, so they lend more, and the interest rate falls.

When there is a decrease in the price level and other things remains constant, then as a result people are holding less money. This will increase the willingness of people to lend more, as a result there is a reduction in the interest rate. This fall in the interest rate will increase the money supply in the economy.