All four of the factors that are affected by changes in the money supply—the supply of loans, Real GDP, the price level, and the expected inflation rate—affect either the supply of or demand for loanable funds, and, therefore, affect the interest rate.
1. Explain what happens to the supply of loans when the money supply increases.
2. Explain what happens to Real GDP when the money supply increases.
3. Explain what happens to the price level when the money supply increases.
4. Describe what happens to the expected inflation rate when the money supply increases.
5. Describe the liquidity effect.
6. Describe the income effect.
7. Describe the price-level effect.
8. Describe the expectations effect.
9. Explain why it is difficult to predict exactly what will happen to interest rates when the money supply changes.