If the Fed responds to repeated decreases in the short-run aggregate supply with repeated increases in the quantity of money, the economy will be faced with
A) a one-time increase in prices.
B) continuous inflation.
C) alternating periods of inflation and deflation.
D) steady decreases in real GDP.

Question

Quizplus · Accepted Answer

Repeated increases in the quantity of money in response to decreases in short-run aggregate supply will lead to continuous inflation. This is because continuously adding more money into the economy without a corresponding increase in goods and services will increase the price level over time.

If the Fed Responds to Repeated Decreases in the Short-Run