When the Fed unexpectedly increases the money supply, it will cause an increase in aggregate demand because
A) lower interest rates will stimulate business investment and consumer purchases.
B) real interest rates will fall, causing the dollar to depreciate and net exports to rise.
C) lower interest rates will cause the value of assets (for example, stocks) to rise.
D) all of the above are correct.

Question

Quizplus · Accepted Answer

When the Fed unexpectedly increases the money supply, it will lead to lower interest rates which will stimulate business investment and consumer purchases. This will increase aggregate demand. Additionally, the decrease in real interest rates will cause the dollar to depreciate, making exports relatively cheaper and causing net exports to rise. Lastly, lower interest rates will cause the value of assets (for example, stocks) to rise, which will also increase aggregate demand. Therefore, all three options are correct.

When the Fed Unexpectedly Increases the Money Supply, It Will