When the economy is at full employment __________ interest rates are __________ by an expansionary monetary policy if inflationary expectations are generated.

Question

Quizplus · Accepted Answer

When the economy is at full employment, the central bank cannot use expansionary monetary policy to increase output and employment without generating inflationary expectations. The expansionary monetary policy involving an increase in money supply and decrease in interest rates will lead to an increase in aggregate demand, which will increase prices in the long run. Therefore, nominal interest rates are increased to discourage borrowing and reduce aggregate demand.

When the Economy Is at Full Employment __________ Interest Rates