Question

23) A decrease in the discount rate will most likely A) not effect the money supply. B) increase the money supply. C) have an unclear affect on the money supply. D) decrease the money supply.

18) Nominal income is equal to A) aggregate money demand multiplied by aggregate money supply. B) the aggregate price level multiplied by real aggregate income. C) the real aggregate price level divided by the nominal interest rate. D) the aggregate money multiplier divided by the money supply.

Answer 1

Question 23

Discount rate is the interest rate at which central bank make loans to commercial banks.

A decrease in discount rate will reduce the cost of borrowing for commercial banks and would induce them to borrow more from central bank.

Banks used these borrowings to make loan and create money.

So, increase in borrowing by banks will increase the number of loans they make and thereby increase the money supply.

Hence, the correct answer is the option (B) [Increase the money supply].

Question 18

Nominal income is calculated as follows -

Nominal income = Aggregate price level * Real aggregate income

So,

Nominal income is equal to the aggregate price level multiplied by real aggregate income.

Hence, the correct answer is the option (B).