An expansionary monetary policy is most likely to increase real output
A) when the economy is operating at less than full-employment capacity.
B) when the economy is at full employment.
C) when actual output is beyond the economy's long-run capacity.
D) when the inflationary side effects are fully anticipated by decision makers.

Question

Quizplus · Accepted Answer

An expansionary monetary policy involves increasing the money supply and reducing interest rates to encourage borrowing and spending. When the economy is operating below full-employment capacity, there are unused resources such as unemployed labor and unused capital that can be put to use. In this situation, an expansionary monetary policy is likely to increase real output by stimulating demand for goods and services and increasing investment, which can lead to job creation and production. When the economy is at full employment, an expansionary monetary policy is likely to lead to increased inflation instead of increased real output.

An Expansionary Monetary Policy Is Most Likely to Increase Real