When the Fed unexpectedly increases the money supply,
A) real interest rates will tend to decline.
B) the exchange rate value of the dollar will tend to appreciate.
C) aggregate demand will tend to increase.
D) all of the above are correct.
E) both a and c are correct.

Question

Quizplus · Accepted Answer

When the Fed unexpectedly increases the money supply, it leads to an increase in the supply of loanable funds, which reduces the interest rate. As a result, borrowing becomes cheaper, and businesses and consumers are more likely to take out loans to finance investment and spending. This increase in investment and spending leads to an increase in aggregate demand for goods and services, ultimately boosting economic output and providing a spur to economic growth. Additionally, as interest rates fall, the demand for US dollars also tends to fall, leading to a depreciation of the currency relative to other currencies. Therefore, both a and c are correct.

When the Fed Unexpectedly Increases the Money Supply