Final answer:
An increase in the money supply causes interest rates to decrease in the short run, as more loanable funds become available and competition among lenders increases.
Step-by-step explanation:
In the short run, an increase in the money supply typically causes interest rates to decrease. This is because a higher money supply leads to a higher amount of available loanable funds, resulting in more people wanting to lend. As the supply of money increases, the competition among lenders to provide loans causes them to lower the price of borrowing, which is the interest rate. Thus, borrowers are incentivized to take on more debt as it becomes cheaper to do so, potentially boosting consumption and investment spending in the economy.
If the Federal Reserve increases the supply of money at an increasing rate, this could lead to various impacts on the economy, including potential changes in GDP, unemployment, and inflation. An initial increase in money supply may stimulate economic growth and reduce unemployment, but if it continues unchecked, it could lead to higher inflation as more money chases the same amount of goods and services.