If the economy is at potential output and the Fed increases the money supply, in the short run the aggregate demand will likely decrease.

Question

Quizplus · Accepted Answer

If the economy is already at potential output, increasing the money supply may lead to an increase in aggregate demand as there is more money circulating in the economy. However, this can also lead to inflation if the increase in demand outstrips the ability of suppliers to increase output. Therefore, the statement in the question is false.

If the Economy Is at Potential Output and the Fed