The Fed increases money supply. In this case, the time lag problem of monetary policy may
A) increase the velocity of money in the short run.
B) increase real GDP in the short run.
C) decrease the velocity of money in the short run.
D) none of the above

Question

Quizplus · Accepted Answer

Increasing money supply may take time to translate into increased spending and economic activity, which is the time lag problem of monetary policy. In the short run, people may hold onto the additional money and not spend it immediately, resulting in a decrease in the velocity of money. This means that the same amount of money is used to support fewer transactions, which can lead to lower economic activity. Therefore, choice C is the best answer. Choices A and B are inconsistent with the time lag problem and the short-run impact of monetary policy.

The Fed Increases Money Supply