If all wages and prices are perfectly flexible with respect to expected changes in the price level,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) an increase in the price level
D) both B and C of the above

Question

Quizplus · Accepted Answer

If wages and prices are perfectly flexible, an expansionary monetary policy will shift the aggregate demand curve to the right. However, output will only increase if the policy is unanticipated, as anticipated changes will be adjusted for by flexible wages and prices. Additionally, the price level will increase due to the higher demand.

If All Wages and Prices Are Perfectly Flexible with Respect