What is a likely result of increasing the money supply?

What is a likely result of increasing the money supply?

• A. Demand increases and prices rise
• B. Demand decreases
• C. Currency strengthens
• D. Unemployment decreases

Answer: (A)

When the money supply rises, monetary policy is expansionary. This tends to lower short-run interest rates, encouraging households and firms to borrow and spend. With more money chasing goods, overall demand in the economy increases, so the aggregate demand curve shifts right. In the short run, this higher demand pushes up prices because firms respond to stronger demand by charging more, leading to inflationary pressure. So the most direct and likely outcome is that demand increases and prices rise. The currency would typically weaken rather than strengthen with a higher money supply, and while unemployment can fall in the short run as output rises, the inflationary effect of higher demand is the clearest consequence.

When the money supply rises, monetary policy is expansionary. This tends to lower short-run interest rates, encouraging households and firms to borrow and spend. With more money chasing goods, overall demand in the economy increases, so the aggregate demand curve shifts right. In the short run, this higher demand pushes up prices because firms respond to stronger demand by charging more, leading to inflationary pressure. So the most direct and likely outcome is that demand increases and prices rise. The currency would typically weaken rather than strengthen with a higher money supply, and while unemployment can fall in the short run as output rises, the inflationary effect of higher demand is the clearest consequence.