When the economy is at potential output and the money supply grows, the short-run outcome is typically a rise in which two variables?

• A. Unemployment and prices
• B. Investment and consumer spending
• C. Prices and unemployment
• D. Interest rate and inflation

Answer: (B)

When money supply grows, interest rates tend to fall. That cheaper credit makes borrowing more attractive for households and firms, boosting demand in the short run. Lower financing costs encourage households to spend more on durable goods and big purchases, raising consumer spending, while firms are more likely to invest in new projects. Together, these effects lift spending and investment, which is why the two variables that rise first in this scenario are investment and consumer spending. Other options don't fit as neatly: unemployment is unlikely to rise when monetary policy is expansionary, and although prices can rise, the most immediate and direct response to easier credit is higher investment and consumption.