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

Question

Quizplus · Accepted Answer

Increasing the quantity of money without any increase in the aggregate supply (output) will lead to continued inflation, as there will be more money chasing the same amount of goods and services. This is known as demand-pull inflation. Therefore, option B is the correct answer.

If the Fed Responds to an Initial Increase in Aggregate