Interest Rate and supply of money

  1. An expansion in the money supply would most likely:
    A. lead to a decline in nominal interest rates.
    B. lead to an increase in nominal interest rates.
    C. reduce the equilibrium amount of money that economic agents would wish to hold.

A is correct. Increasing the supply of money, all other things being equal, will reduce its “price,” that is, the interest rate on money balances.

I don’t understand this phrase reduce its “price,” that is, the interest rate on money balances.

“Price” is probably a poor choice of words.

“Rent” is better.

It’s like the supply/demand graph for a good or service: if supply expands, the supply curve shifts right and the equilibrium price drops. For money, like s2000magician points out, the “price” is the interest rate: with more money floating around, it is easier to acquire, so nominal interest rates drop.