Starting from a position of macroeconomic equilibrium at the full-employment level of real GDP, in the short run an unanticipated increase in the money supply will
A) raise real interest rates, lower prices, and reduce real GDP.
B) raise real interest rates, lower prices, and leave real GDP unchanged.
C) raise nominal interest rates, lower prices, and leave real GDP unchanged.
D) lower real interest rates, raise prices, and increase real GDP.

Question

Quizplus · Accepted Answer

In the short run, an unanticipated increase in the money supply will lower real interest rates as individuals have more money to lend and are willing to lend at lower rates. This will increase investment and consumption expenditures, leading to an increase in demand and output, and hence increasing real GDP. The increase in demand will also lead to an increase in prices. Thus, the correct answer is D, lowering real interest rates, raising prices, and increasing real GDP.

Starting from a Position of Macroeconomic Equilibrium at the Full-Employment