If the economy is at potential output and the Fed increases the money supply, in the short run the aggregate demand will likely:
A) shift to the left.
B) remain the same.
C) increase.
D) decrease.

Question

Quizplus · Accepted Answer

If the economy is already operating at its potential output, the long-run aggregate supply curve is vertical, meaning that an increase in the money supply will not affect potential output. However, in the short run, the increase in the money supply will lead to a decrease in interest rates, which in turn will stimulate investment and consumption spending, thus increasing aggregate demand.

If the Economy Is at Potential Output and the Fed