Assuming that the rational expectations hypothesis is NOT in effect, in the short run an expansionary monetary policy should
A)shift the aggregate supply function.
B)increase real Gross Domestic Product (GDP)and the price level.
C)increase the rate of unemployment.
D)generate stagflation.

Question

Quizplus · Accepted Answer

In the short run, an expansionary monetary policy would increase the money supply and lower interest rates, which should increase aggregate demand. Since prices and wages are sticky in the short run, there will be an increase in real GDP and a rise in the price level. However, this may not affect the rate of unemployment, and it may not necessarily lead to stagflation, which is a combination of high inflation and high unemployment.

Assuming That the Rational Expectations Hypothesis Is NOT in Effect