Final answer:
When the Fed supplies too much monetary stimulus during a negative aggregate demand shock, it can lead to increased inflation, which aligns with option A from the available choices.
Step-by-step explanation:
When the Federal Reserve supplies "too much" monetary stimulus in the face of a negative aggregate demand shock, it can lead to increased inflation. This scenario is represented by the option A) It can lead to increased inflation. Expansionary monetary policy involves the central bank increasing the supply of money and loanable funds, which decreases the interest rate, stimulates borrowing for investment and consumption, and shifts aggregate demand to the right. This results in a higher price level and, at least in the short run, a higher real Gross Domestic Product (GDP).
However, too much monetary stimulus in times of weak demand can overshoot its intended effects and create inflationary pressures. This is because even though demand may be weak, an excessive increase in the money supply can still lead to too many dollars chasing too few goods, causing prices to rise.