If the economy is at potential output and the Fed increases the money supply, in the short run the likely result will be a(n) _____ in investment and a(n) _____ in consumption.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Question

Quizplus · Accepted Answer

When the Fed increases the money supply, interest rates typically decrease in the short run, making borrowing cheaper. This encourages more investment and consumption as businesses expand and individuals spend more, respectively.

If the Economy Is at Potential Output and the Fed