If the economy is at potential GDP and the Fed increases the quantity of money, then

Question

Quizplus · Accepted Answer

When the Fed increases the quantity of money in an economy that is already at potential GDP, it leads to an increase in aggregate demand, pushing output and employment above their long-run levels. However, as the economy adjusts to the new, higher level of demand, inflationary pressures build up, leading to a rise in prices (inflation). As a result, eventually, the economy returns to its potential level of output, and the increase in real GDP is only temporary.

If the Economy Is at Potential GDP and the Fed