If the economy is at potential GDP and the Fed increases the quantity of money, then
A) potential GDP rises.
B) real GDP rises permanently above potential GDP.
C) real GDP rises temporarily above potential GDP.
D) potential GDP and real GDP both decrease.

Question

Quizplus · Accepted Answer

If the economy is already at potential GDP, then increasing the quantity of money will only lead to a temporary increase in real GDP, as resources are fully employed and cannot be expanded in the long run. However, this increase in money supply could lead to inflationary pressures if it is sustained over time.

If the Economy Is at Potential GDP and the Fed