Suppose the Federal Reserve increases the money supply. Which of the following will tend to occur as a result of this policy in a Keynesian model?
A)an inflationary gap
B)demand-pull inflation
C)a movement along the short-run aggregate supply curve
D)all of the above

Question

Quizplus · Accepted Answer

An increase in the money supply will lead to an increase in aggregate demand, which can lead to an inflationary gap and demand-pull inflation. As output increases, firms may increase prices, leading to a movement along the short-run aggregate supply curve. Therefore, all of the above options are correct.

Suppose the Federal Reserve Increases the Money Supply