If the economy is at potential output and the Fed increases the money supply, in the short run real GDP will likely:
A) fluctuate randomly.
B) remain the same.
C) decrease.
D) increase.

Question

Quizplus · Accepted Answer

If the economy is already at potential output, increasing money supply through monetary policy will stimulate spending and investment, leading to an increase in Aggregate Demand (AD) and Real GDP in the short run. However, as the economy approaches full employment of resources, any further increase in AD will only raise the price level and result in inflation.

If the Economy Is at Potential Output and the Fed