If the short-run aggregate supply curve is horizontal, and each member of the general public chooses to hold a larger fraction of his or her income as cash balances, then:
A)output and employment will increase in the short run.
B)output and employment will decrease in the short run.
C)prices will increase in the short run.
D)prices will decrease in the short run.

Question

Quizplus · Accepted Answer

When people hold more cash, they spend less, reducing aggregate demand. With a horizontal short-run aggregate supply curve, this leads to lower output and employment without affecting prices.

If the Short-Run Aggregate Supply Curve Is Horizontal, and Each