If the Fed responds to an increase in aggregate demand by increasing the quantity of money
A) nothing happens because aggregate demand had already increased.
B) output will begin to decrease more rapidly than in the case in which only the first increase in aggregate demand happened.
C) money wage rates will fall to reduce unemployment.
D) there will be continued inflation.

Question

Quizplus · Accepted Answer

Increasing the quantity of money in response to an increase in aggregate demand can lead to higher inflation as more money chases the same amount of goods and services, pushing prices up.

If the Fed Responds to an Increase in Aggregate Demand