Question

Suppose the Federal Reserve begins to increase the supply of money at an increasing rate. What impact would that have on GDP, unemployment, and inflation?

Short answer

This would result in an increase in the GDP (gross domestic product), and also an increase in employment (decrease in unemployment), and have higher prices until when potential output is reached. And after that given point, this expansionary policy simply creates inflation.

Step-by-step solution

Step 1. Definition

Expansionary monetary policy is a type of monetary policy in which the money supply is expanded faster than usual or we can decrease the short-term interest rates.it is approved by central banks of the country through OMOs (open market operations), interest rate setting, the requirement of reserves.

Step 2. Explanation

When expansionary monetary policy is formulated, this makes a rightward shift in AD. And when we continue with the expansionary policy this would make bigger and larger shifts to the right (parameters given).

This would result in an increase in the GDP (gross domestic product), and also an increase in employment (decrease in unemployment), and have higher prices until when potential output is reached. And after that given point, this expansionary policy simply creates inflation.