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Short answer questions: explain how an increase in the money supply lead to and an increase...

Short answer questions:

  1. explain how an increase in the money supply lead to and an increase in interest rates.
  1. Explain why GDP may not always be the best measure of economic welfare.
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Answer #1

Answer 1 - When money supply increases, there is a lot of money available in the economy for borrowing. This tends to reduce the interest rate or price for borrowing money. Similarly when the money supply is reduced, it tends to push up the interest rates.

There is a small error in the question that is instead of decrease in interest rates, there it is written increase in interest rates.

Answer 2 - Despite of several shortcomings GDP is commonly used as a measure of economic welfare. As a result, GDP often fails to account the non market transactions, wealth distribution, effects of externalities, rather it fails to indicate whether the nation's rate of growth is sustainable or not. These are some reasons of why GDP is not always the best measure or indicator of economic welfare.

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