In the aggregate demand-aggregate supply model in the short run, an increase in the money supply will lead to a(n) _____
A) increase in both the price level and real GDP.
B) increase in the price level only.
C) increase in real GDP and a decrease in the price level.
D) decrease in real GDP and an increase in the price level.

Question

Quizplus · Accepted Answer

An increase in the money supply shifts the aggregate demand curve to the right, leading to an increase in both the price level and real GDP in the short run. This is because the increase in money supply lowers interest rates, making borrowing cheaper, increasing consumer and business spending, and ultimately increasing the demand for goods and services. As a result, producers increase production, raise prices, and increase real GDP to meet the increased demand.

In the Aggregate Demand-Aggregate Supply Model in the Short Run