If the Fed responds to an initial increase in aggregate demand by increasing the quantity of money
A) there will be no inflationary gap.
B) real GDP will begin to decrease more rapidly than if the quantity of money had remained constant.
C) money wages will fall to reduce unemployment.
D) there is the risk of continued inflation.

Question

Quizplus · Accepted Answer

When the Fed increases the quantity of money in response to an initial increase in aggregate demand, it can fuel further increases in aggregate demand. This can lead to higher prices and wages as the economy operates at or beyond its full capacity, creating a risk of continued inflation.

If the Fed Responds to an Initial Increase in Aggregate