If the economy is at potential output and the Fed increases the money supply, in the short run interest rates will likely:
A) increase.
B) decrease.
C) remain constant.
D) fluctuate randomly.

Question

Quizplus · Accepted Answer

If the economy is already at potential output, then any increase in the money supply is likely to lead to an increase in aggregate demand, as people and firms have more money to spend. This increase in demand will likely lead to an increase in prices and output in the short run, but interest rates will likely decrease as the Federal Reserve increases the money supply to stimulate the economy.

If the Economy Is at Potential Output and the Fed