Persistently expansionary monetary policy that stimulates aggregate demand and leads to inflation will

Question

Quizplus · Accepted Answer

Expansionary monetary policy can stimulate aggregate demand in the short run, increasing output and employment. However, if decision-makers anticipate the inflation, they may demand higher wages and prices, leading to higher costs for firms and reducing output. In the long run, inflationary expectations may also lead to higher nominal interest rates, reducing investment and potentially causing a recession. Therefore, persistently expansionary monetary policy that leads to inflation may ultimately fail to increase real output once decision-makers fully anticipate the inflation.

Persistently Expansionary Monetary Policy That Stimulates Aggregate Demand and Leads