The most likely impact of an unanticipated increase in the money supply is a(n):
A)increase in the real interest rate, which in turn stimulates investment and GDP.
B)decrease in the real interest rate, which in turn stimulates investment and GDP.
C)decrease in real output, which causes the real interest rate to decline and in turn stimulate investment and GDP.
D)increase in real output, which causes the real interest rate to decline.

Question

The most likely impact of an unanticipated increase in the money supply is a(n):
A)​increase in the real interest rate, which in turn stimulates investment and GDP.
B)​decrease in the real interest rate, which in turn stimulates investment and GDP.
C)​decrease in real output, which causes the real interest rate to decline and in turn stimulate investment and GDP.
D)​increase in real output, which causes the real interest rate to decline.

Quizplus · Accepted Answer

An unanticipated increase in the money supply leads to a surplus of money in the economy, which in turn leads to a decrease in the real interest rate. This decrease in the interest rate stimulates investment and consumption, which leads to an increase in GDP. Therefore, option B is the correct answer. Option A is incorrect because an increase in the real interest rate would actually discourage investment and consumer spending. Option C is incorrect because a decrease in real output due to inflation resulting from an increase in the money supply is not likely to stimulate investment and GDP. Option D is incorrect because an increase in real output is not necessarily a guaranteed outcome of an increase in the money supply.

The Most Likely Impact of an Unanticipated Increase in the Money