Suppose oil prices rise and short-run aggregate supply decreases. If the Fed responds by increasing the quantity of money, then in the short run

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When the Fed increases the quantity of money in response to a decrease in short-run aggregate supply (due to rising oil prices), it aims to counteract the negative impact on the economy. This action typically leads to an increase in real GDP as more money in the economy boosts spending. However, it also leads to a higher price level, as the increased money supply can contribute to inflation, especially when combined with the initial rise in oil prices that decreases aggregate supply.

Suppose Oil Prices Rise and Short-Run Aggregate Supply Decreases