If money supply is increased by 20% and the entire increase is absorbed by speculative demand by how much?

Question

interest rate would fall?

Answer 1

The economy is in Liquidity trap. How ever much you increase moneu supply, the entire money supply is demanded by the public and hence interest rate cannot fall further at all. The slope of the demand for money at the current and lower rates of interest is perfectly elastic and horizontal to the money supply axis.

Answer 2

Absorption of a 20% money supply increase wouldn't really happen unless that increase was converted into Cold Cash and somebody buried it in their backyard. The reason is that if they deposited that money into a bank, that money would be put back into the financial/economic system in the form of loans from that bank. Thus negating any absorption attempt.  As such, Interest Rates would rise to curb the inflation of an expanded money supply.