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An increase in the supply of cash on the overnight money market will lead to​ a(n) ____________ in interest rates and​ a(n)_________ in investment expenditure. a. decrease; decrease b. decrease; increase c. increase; decrease d. increase; increase

Question

An increase in the supply of cash on the overnight money market will lead to​ a(n) ____________ in interest rates and​ a(n)_________ in investment expenditure.

a. decrease; decrease

b. decrease; increase

c. increase; decrease

d. increase; increase

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Solution

The correct answer is:

b. decrease; increase

An increase in the supply of cash on the overnight money market means that there is more money available for banks to lend to each other. This increased supply of money will lead to a decrease in the interest rate, as banks do not need to charge as much to lend out their excess cash.

Lower interest rates make borrowing cheaper for businesses and households, which can encourage more investment. Therefore, investment expenditure is likely to increase. So, an increase in the supply of cash on the overnight money market will lead to a decrease in interest rates and an increase in investment expenditure.

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