The Sponeto national bank advocates increasing the money supply to enc

QUESTION

The Sponeto national bank advocates increasing the money supply to encourage investment within the country. Which of the following, if true, strengthens the case that this will cause inflation?

A) Jobs will be created.
B) Banks will lower interest rates.
C) Wages will decrease.
D) Foreign investment will be discouraged.
E) Only low-technology sectors will benefit.

ANSWER

Answer: B
Explanation: B) Increasing the money supply causes banks to lower interest rates since money is less scarce, which tends to lead to higher prices and inflation. The creation of jobs (Choice A) in a growing economy may be accompanied by inflation but does not in itself cause inflation. Choices C and D are not associated with an inflationary economic environment. Choice E does not strengthen the case that increasing the money supply causes inflation.