Final answer:
Increasing the money supply can boost GDP and decrease unemployment in the short term but can lead to inflation if it exceeds the economy's productive capacity.
Step-by-step explanation:
According to the thinking of the time, increasing the money supply was believed to have several effects on an economy. In the short term, a higher money supply can boost Gross Domestic Product (GDP) because it encourages lower interest rates, which can stimulate borrowing and spending. This can, in turn, lead to increased production and potentially lower unemployment as businesses hire more workers to meet demand.
However, if the money supply continues to grow and exceeds the productive capacity of the economy, it can lead to inflation. Inflation occurs when the prices of goods and services rise because there is more money chasing the same amount of goods. Therefore, while an increase in money supply can stimulate economic activity in the short term, it can potentially lead to higher inflation rates if not managed properly.