Monetary policy is most likely to result in inflation when the aggregate supply curve is
A)Vertical and the Fed lowers the discount rate.
B)Vertical and the Fed raises the reserve requirement.
C)Horizontal and the Fed sells securities.

Question

Quizplus · Accepted Answer

When the aggregate supply curve is vertical, it means that the supply of goods and services is fixed and cannot be increased. If the Fed lowers the discount rate, it will make it cheaper for banks to borrow money, which will lead to an increase in the money supply. This increase in the money supply will lead to an increase in demand for goods and services, which will put upward pressure on prices and result in inflation.

Monetary Policy Is Most Likely to Result in Inflation When