In the short run, a temporary increase in money supply
A) shifts the DD curve to the right, increases output and appreciates the currency.
B) shifts the AA curve to the left, increases output and depreciates the currency.
C) shifts the AA curve to the left, decreases output and depreciates the currency.
D) shifts the AA curve to the left, increases output and appreciates the currency.
E) shifts the AA curve to the right, increases output and depreciates the currency.

Question

Quizplus · Accepted Answer

A temporary increase in money supply lowers interest rates, which depreciates the currency due to capital outflow seeking higher returns elsewhere. This depreciation makes domestic goods cheaper for foreigners, increasing exports and output. The AA curve, representing monetary conditions, shifts right in response to the increased money supply.

In the Short Run, a Temporary Increase in Money Supply