If the Bank of Japan permanently increases its money supply, then which of the following is most likely to take place in the short run?
A) Japanese prices will immediately decrease.
B) Japanese prices will immediately increase.
C) Japanese interest rates will increase.
D) Japanese interest rates will decrease.

Question

Quizplus · Accepted Answer

If the Bank of Japan permanently increases its money supply, it means that there will be more money available in the economy. This will lead to a decrease in the interest rates as banks will have more money to lend. As a result, borrowing will become cheaper, and people and firms will increase their spending. This increase in spending will lead to an increase in aggregate demand, which will cause prices to increase in the short run. Therefore, the most likely outcome in the short run is that Japanese interest rates will decrease (D) and Japanese prices will immediately increase.

If the Bank of Japan Permanently Increases Its Money Supply