Question

Suppose the economy is operating below its full employment level. The Fed canA. move the economy toward the full employment level by expanding the money supply to increase aggregate supply.B.can move the economy toward the full employment level by expanding the money supply to increase aggregate demand and to hold prices constant.C.can move the economy toward the full employment level by expanding the money supply to increase aggregate demand through both its direct and its indirect effects.D.is powerless to affect either aggregate demand or aggregate supply. Fiscal policy is needed.

Answer 1

Answer: The correct answer is C. Can move the economy toward the full employment level by expanding the money supply to increase aggregate demand through both its direct and its indirect effects.

Explanation: By expanding the money supply, the agents' spending capacity increases and this results in increased consumption and investment, therefore increases aggregate demand and increases production and employment. But as a negative effect inflation can rise.