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If the economy is at full employment and the Federal Reserve undertakes a policy of increasing the money supply at a constant rate of 6% while the production of goods and services is growing at 2%, what would you expect to happen?

A. Interest rates will go down and employment will increase.
B. The government budget will run a surplus.
C. Inflation will increase.
D. The government budget will run a deficit.

Please select the best answer from the choices provided:
A B C D



Answer :

GinnyAnswer

Final answer:

Increasing the money supply by the Federal Reserve can lead to higher GDP, potentially lower unemployment, and increased inflation.


Explanation:

An increase in the money supply by the Federal Reserve would have the following impacts:

  1. Real GDP: Real GDP would rise due to increased investment and net exports.
  2. Unemployment: Lower interest rates would stimulate investment, potentially reducing unemployment.
  3. Inflation: The increased money supply could lead to inflationary pressures due to higher demand.

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