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 the unemployment.
D) there is the risk of continued inflation.

Question

Quizplus · Accepted Answer

Increasing the quantity of money in response to an initial increase in aggregate demand can lead to continued inflation, as there will be more money chasing the same amount of goods and services. This can eventually lead to a further increase in aggregate demand and a higher inflation rate.

If the Fed Responds to an Initial Increase in Aggregate