If the Federal Reserve unexpectedly increases the money supply, which of the following will most likely happen in the short run?
A) real GDP will rise.
B) real GDP will fall.
C) real interest rates will rise.
D) the budget deficit will rise.

Question

Quizplus · Accepted Answer

An unexpected increase in the money supply will likely lead to lower interest rates, which in turn will increase consumption and investment spending. This increase in spending will lead to an increase in aggregate demand and, in the short run, an increase in real GDP.

If the Federal Reserve Unexpectedly Increases the Money Supply, Which