Expansionary Monetary Policy Shifts Equilibrium Rightward

Steps:

• Initial equilibrium at O in the money market or IS-LM model.
• Increasing money supply shifts the LM curve right, lowering interest rates for a given output level.
• This moves equilibrium to higher output (point Y) and lower interest rates.
• Contractionary policy would shift left, raising rates and lowering output.

Why C is correct:

• Expansionary monetary policy increases money supply, decreasing interest rates per the liquidity preference theory (demand for money exceeds supply, pressuring rates down).

Why the others are wrong:

• A: Money supply increase lowers interest rates, not raises them.
• B: Money supply decrease raises interest rates, not lowers them.
• D: Money supply decrease raises interest rates but shifts equilibrium left to lower output, not Y.

Final answer: C