When the Fed unexpectedly increases the money supply, it will cause an increase in aggregate demand because:
A)real interest rates will fall, stimulating business investment and consumer purchases.
B)the dollar will depreciate on the foreign exchange market, leading to an increase in net exports.
C)lower interest rates will tend to increase asset prices, which increases wealth and thereby stimulates current consumption.
D)of all the above reasons.

Question

When the Fed unexpectedly increases the money supply, it will cause an increase in aggregate demand because:​
A)​real interest rates will fall, stimulating business investment and consumer purchases.
B)​the dollar will depreciate on the foreign exchange market, leading to an increase in net exports.
C)​lower interest rates will tend to increase asset prices, which increases wealth and thereby stimulates current consumption.
D)​of all the above reasons.

Quizplus · Accepted Answer

All of the given reasons are valid explanations for why an unexpected increase in the money supply will cause an increase in aggregate demand. Lower real interest rates stimulate business investment and consumer purchases, a weaker dollar makes exports cheaper and imports more expensive, and higher asset prices increase wealth and stimulate current consumption. Therefore, all the above reasons indicate that the best choice is D.

When the Fed Unexpectedly Increases the Money Supply, It Will