An expansionary monetary policy is most likely to produce an inflationary effect with little impact on output when the economy
A) is near full employment and the short-run aggregate supply curve is flat.
B) is near full employment and the short-run aggregate supply curve is steep.
C) has substantial unemployment and the short-run aggregate supply curve is steep.
D) has substantial unemployment and the short-run aggregate supply curve is flat.

Question

Quizplus · Accepted Answer

When an economy is near full employment and the short-run aggregate supply curve is steep, an expansionary monetary policy is most likely to lead to an increase in prices (inflation) with little impact on output, also known as the "cost-push" inflation. This is because the increase in demand will quickly be met with a limited ability of the economy to increase output, resulting in higher prices. When the short-run aggregate supply curve is flat, the expansionary monetary policy may lead to an increase in output and employment with little impact on prices, known as "demand-pull" inflation. When there is substantial unemployment, regardless of the shape of the short-run aggregate supply curve, the expansionary monetary policy is more likely to lead to an increase in output and employment, with little impact on prices.

An Expansionary Monetary Policy Is Most Likely to Produce an Inflationary