Given Keynesian assumptions about the shape of the aggregate supply curve and an economy suffering a recession,which of the following is most likely to occur if the Fed pursues expansionary monetary policy?
A) The equilibrium price level and output will both increase until full employment is reached.
B) The equilibrium price level and output will both decrease.
C) The equilibrium price level will increase but output will stay the same.
D) The equilibrium output will increase but the price level will stay the same until full employment is reached.

Question

Quizplus · Accepted Answer

Under Keynesian assumptions, during a recession, the aggregate supply curve is relatively flat. This means that increases in aggregate demand, such as those resulting from expansionary monetary policy, will primarily increase output without significantly affecting the price level, at least until full employment is reached.

Given Keynesian Assumptions About the Shape of the Aggregate Supply