If the aggregate demand curve shifts rightward following a decrease in the federal funds rate, what can be concluded if the short-run aggregate supply curve is rather steep?

Question

Quizplus · Accepted Answer

When the short-run aggregate supply curve is steep, it means that the economy is operating close to its full capacity and there is little spare capacity or unemployed resources. In this scenario, when the aggregate demand curve shifts rightward after a decrease in the federal funds rate, there will be little room for an increase in real GDP due to the limited capacity of the economy. However, the increase in demand will lead to a significant increase in the price level. Therefore, option A is the best answer.

If the Aggregate Demand Curve Shifts Rightward Following a Decrease