Choice "a" is correct. Expansionary monetary policy results when the Fed increases the money

supply. Expansionary monetary policy affects the economy through the following chain of events: (1)

an increase in the money supply causes interest rates to fall, (2) falling interest rates stimulate the

desired levels of firm investment and household consumption, (3) increases in desired investment

and consumption cause an increase in aggregate demand, and (4) aggregate demand shifts to the

right causing real GDP and the price level to rise.

Choice "b" is incorrect. An increase in the money supply causes investment to increase, not decrease.

Choice "c" is incorrect. An increase in the money supply causes interest rates to decrease, not

increase, investment to increase, not decrease and aggregate demand to increase, not decrease.

Choice "d" is incorrect per above Explanation: .