Given a vertical aggregate supply curve,which of the following is most likely to occur if the Fed pursues restrictive monetary policy?
A)The equilibrium price level and output will both increase.
B)The equilibrium price level and output will both decrease.
C)The equilibrium price level will decrease but output will stay the same.

Question

Quizplus · Accepted Answer

A vertical aggregate supply curve means that the economy has reached its full capacity, and any increase in aggregate demand will not lead to an increase in output. With a restrictive monetary policy, the Fed will decrease the money supply and increase interest rates, which will cause a decrease in aggregate demand. Since the supply curve is vertical, output will not change, but the equilibrium price level will decrease.

Given a Vertical Aggregate Supply Curve,which of the Following Is