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The Federal Reserve decides to increase the money supply by 5 percent. What is the impact...

The Federal Reserve decides to increase the money supply by 5 percent. What is the impact on interest rates and prices in the short run according to the AD-AS model?

increases; decreases

increases; increases

decreases; decreases

decreases; increases

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Answer #1

Answer) Federal Reserve decides to increase the money supply by 5 percent. Interest rates will increase and prices will decrease in the short run because as central bank increases the Money supply both the LM curve and AD curve will shift the right so when AD shift to the right it will create inflationary pressure in the economy which increases the price level and when LM curve shift to the right interest rate will fall.

Hence option A is the correct answer.

Note: Please like my answer and comment for further clarification, it's urgent.

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