Cannon Trust School Level I Practice Exam

When the central bank expands the money supply, the immediate impact is on borrowing costs: interest rates fall. More liquidity in the banking system means banks have more funds to lend, which reduces the price of money and pushes short‑term interest rates down. This is the direct effect of monetary expansion—lower borrowing costs for households and firms.

Inflation can rise as a result of stronger demand, and unemployment can fall as output expands, but those are not the immediate, direct outcomes of expanding the money supply. So the best answer is the drop in interest rates.