If a rise in the expected price level results in an immediate and equal rise in wages and prices, then an expansionary monetary policy will cause ________.
A) the aggregate demand curve to shift to the right, and output to increase only if the policy is anticipated
B) the aggregate demand curve to shift to the right, and output to increase only if the policy is unanticipated
C) a decline in the price level
D) B and C only

Question

Quizplus · Accepted Answer

An expansionary monetary policy typically shifts the aggregate demand curve to the right, leading to an increase in output and prices. However, if the expected price level rise leads to an immediate and equal rise in wages and prices, the real effects of the policy (like output increase) depend on it being unanticipated. If agents anticipate the policy, they adjust their expectations and actions accordingly, diminishing the real effects on output.

If a Rise in the Expected Price Level Results in an Immediate