If the Fed overreacts to a negative spending shock by increasing money growth too much:
A) both real GDP growth and inflation will decrease more than the Fed prefers.
B) both real GDP growth and inflation will increase more than the Fed prefers.
C) real GDP growth will increase more and inflation will increase less than the Fed prefers.
D) real GDP growth will increase less and inflation will increase more than the Fed prefers.

Question

Quizplus · Accepted Answer

If the Fed overreacts to a negative spending shock by increasing money growth too much, it will lead to both real GDP growth and inflation increasing more than the Fed prefers. This is because excessive money supply can stimulate economic activity (thus increasing real GDP growth) but also lead to higher inflation rates.

If the Fed Overreacts to a Negative Spending Shock by Increasing