The Deese-Roediger-McDermott (DRM) paradigm examines false memory by introducing words associated with a non-presented ‘critical lure’ as memoranda, which typically causes the lures to be remembered as frequently as studied words. Our prior work has shown enhanced veridical memory and reduced misinformation effects when arousal is induced after learning (i.e., during memory consolidation). These effects have not been examined in the DRM task, or with signal detection analysis, which can elucidate the mechanisms underlying memory alterations. Thus, 130 subjects studied and then immediately recalled six DRM lists, one after another, and then watched a 3-min arousing (n = 61) or neutral (n = 69) video. Recognition tested 70 min later showed that arousal induced after learning led to better delayed discrimination of studied words from (a) critical lures, and (b) other non-presented ‘weak associates.’ Furthermore, arousal reduced liberal response bias (i.e., the tendency toward accepting dubious information) for studied words relative to all foils, including critical lures and ‘weak associates.’ Thus, arousal induced after learning effectively increased the distinction between signal and noise by enhancing access to verbatim information and reducing endorsement of dubious information. These findings provide important insights into the cognitive mechanisms by which arousal modulates early memory consolidation processes.