Question

In an economy experiencing a recession, with many unemployed resources, an increase in the money supply (M) would most likely lead to which scenario in the short run?

Answer 1

If you increase the money supply (M), it will cause inflation. Inflation is when the goods and services prices is rising while the purchasing power is falling. Another thing we must take note is that recession creates a fall in inflation rate. Therefore, it balances the economy of the country for the mean time.