Monetary policy affects GDP and the price level by:
A) changing aggregate supply.
B) changing aggregate demand.
C) changing the aggregate amount of labor supplied.
D) changing exports.

Question

Quizplus · Accepted Answer

Monetary policy works primarily by changing the money supply and interest rates, which in turn can affect aggregate demand. By reducing interest rates and increasing the money supply, monetary policy can stimulate spending and investment, increasing aggregate demand and thus GDP. However, if the economy is already at full employment, this increase in demand can lead to inflation, which in turn would affect the price level. Therefore, the best choice is B, as monetary policy affects both GDP and the price level primarily through changes in aggregate demand.

Monetary Policy Affects GDP and the Price Level By