Under what conditions will the inflationary impact of an expansionary monetary policy be the largest?
A)When equilibrium real GDP is at potential real GDP.
B)When there is a recessionary gap.
C)When unemployment rates are high and there is substantial excess industrial capacity.
D)When real GDP is falling and the price level is decreasing.

Question

Quizplus · Accepted Answer

When equilibrium real GDP is at potential real GDP, any increase in aggregate demand caused by expansionary monetary policy is more likely to lead to inflation, as output cannot easily increase to meet higher demand.

Under What Conditions Will the Inflationary Impact of an Expansionary