In the aggregate demand-aggregate supply model, the short-run effects of an unanticipated increase in the money supply will be
A) lower real interest rates and an increase in aggregate demand.
B) higher real interest rates and an increase in aggregate demand.
C) lower real interest rates and a reduction in aggregate demand.
D) higher real interest rates and a reduction in aggregate demand.

Question

Quizplus · Accepted Answer

An increase in the money supply will lead to lower real interest rates as more money in circulation will decrease the cost of borrowing. This will increase aggregate demand as firms will undertake more investments and households will spend more due to the lower borrowing costs. Overall, the increase in aggregate demand will lead to an expansion in the economy in the short run.

In the Aggregate Demand-Aggregate Supply Model, the Short-Run Effects of an Unanticipated