If the Fed responds to an increase in aggregate demand by increasing the quantity of money,
A) output will begin to decrease more rapidly than otherwise.
B) there will be continued inflation.
C) nothing happens because aggregate demand had already increased.
D) money wage rates will fall to reduce the unemployment.

Question

Quizplus · Accepted Answer

If the Fed responds to an increase in aggregate demand by increasing the quantity of money, it will lead to continued inflation. This is because an increase in the money supply leads to a decrease in interest rates, which encourages more borrowing and spending. However, if this increase in spending is not met with an increase in supply, it can lead to more demand than there is supply, causing prices to rise.

If the Fed Responds to an Increase in Aggregate Demand