Assuming the aggregate supply curve is vertical,which of the following is most likely to occur if the Fed pursues expansionary monetary policy?
A)The equilibrium price level and output will both increase.
B)The equilibrium price level and output will both decrease.
C)The equilibrium price level will increase but output will stay the same.

Question

Quizplus · Accepted Answer

If the aggregate supply curve is vertical, it means that the economy is producing at its maximum potential output level, and any attempt to increase output will only result in increased prices. With expansionary monetary policy, the Fed increases the money supply, which lowers interest rates and encourages investment and spending. This increases the aggregate demand, but since the aggregate supply is fixed, it only leads to an increase in the equilibrium price level without any change in output. Therefore, the correct choice is C.

Assuming the Aggregate Supply Curve Is Vertical,which of the Following