Question

If the money supply in the economy is currently at MS2, and the Fed uses open market operations to move the money supply to MS3, what is the overall effect on the economy?

Answer 1

Answer: c) Aggregate demand shifted out, causing GDP to rise

Step-by-step explanation:

If the Fed increases money supply such that it moves from MS2 to MS3, there will be more money in the economy which would reduce the cost of borrowing.

Both people and firms will therefore borrow more to both consume and invest(both components of Aggregate demand) and this will lead to a rise in Aggregate demand causing it to shift out. The GDP will therefore rise as a result.