If the Fed unexpectedly increases the money supply, real GDP
A) increases because the resulting increase in the interest rate leads to a decrease in investment.
B) increases because the resulting decrease in the interest rate leads to an increase in investment.
C) decreases because the resulting increase in the interest rate leads to a decrease in investment.
D) decreases because the resulting increase in the interest rate leads to an increase in investment.
E) decreases because the resulting decrease in the interest rate leads to an increase in investment.

Question

Quizplus · Accepted Answer

An unexpected increase in the money supply will lead to a decrease in interest rates. Lower interest rates make borrowing cheaper for firms, which may encourage them to increase investment spending. This increase in investment spending can lead to an increase in aggregate demand and ultimately result in an increase in real GDP.

If the Fed Unexpectedly Increases the Money Supply, Real GDP