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

Question

Quizplus · Accepted Answer

If the Fed increases the quantity of money in response to an increase in aggregate demand, it will lead to continued inflation. This is because increasing the money supply will result in an increase in aggregate demand, which will put upward pressure on prices. Therefore, the best choice is D.

If the Fed Responds to an Increase in Aggregate Demand