The inflationary effect of an expansionary monetary policy depends on the slope of the aggregate supply curve.

Question

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The inflationary effect of an expansionary monetary policy depends on the slope of the aggregate supply curve because it determines how much output can be produced at a given price level. If the aggregate supply curve is relatively flat (i.e. elastic), an increase in demand may lead to a greater increase in output than in prices, resulting in only a small inflationary effect. However, if the aggregate supply curve is relatively steep (i.e. inelastic), an increase in demand will mainly result in higher prices rather than higher output, leading to a more significant inflationary effect.

The Inflationary Effect of an Expansionary Monetary Policy Depends on the Slope