Question

4. If money supply and money demand both increase by same amount, what would be the effect on real GDP?
a. Real GDP would decrease.
b. Real GDP would increase
c. Real GDP would not change.
d. None of the above.

Answer 1

When there is an increase in the supply of money in the economy, the interest rate will decrease. Due to a fall in the interest rate, there will be an increase in investment. More investment by firms will increase their production capacity which will lead to an increase in the production of good and services in the economy.

When there is an increase in the demand for money in the economy and money supply is constant, there will be a rise in the interest rate. So, when money supply and money demand both increases by the same amount, there will be an increase in the production of goods and services, which will increase the real GDP.

Hence, the correct answer is Option B i.e. when money supply and money demand both increases by the same amount Real GDP would increase.