Question

If the economy is at full employment and the Federal Reserve undertakes a policy of increasing the money supply at a constant rate of 6% while the production of goods and services is at 2% what would you expect to happen?

a. interest rates will go down and employment will increase

b. the government budget will run a surplus

c. inflation

d. the government budget will run a deficit and the Federal Reserve will monetize the debt.

Answer 1

the answer to this would be Inflation. Or C as the answer.

Answer 2

Think through this one:
--The bottom two answers concern budget deficits or surpluses, but the question doesn't tell you anything about tax revenue vs. government spending. So neither of those answers applies.
--The first answer is impossible because the economy is already at full employment, so employment can't increase
--Inflation is the answer. Increasing the money supply by 6% while output is increasing by only 2% means that prices will rise: the money supply is increasing faster than output.