If the economy is at potential GDP and the Fed increases the quantity of money, then
A) potential GDP rises.
B) real GDP rises temporarily above potential GDP.
C) real GDP rises permanently above potential GDP.
D) potential GDP and real GDP both decrease.

Question

Quizplus · Accepted Answer

When the Fed increases the quantity of money, it typically leads to lower interest rates, which stimulates investment and consumption. This can cause real GDP to rise temporarily above potential GDP due to increased demand, but it does not change the potential GDP itself. Eventually, the economy may adjust, leading to inflation without permanently higher real GDP.

If the Economy Is at Potential GDP and the Fed