What determines the magnitude of the changes in price level when central bank takes monetary policy measures that leads to a change in the aggregate demand?
A)Changes in the money supply
B)Slope of the aggregate supply curve
C)Rate of change of interest rate
D)Total money supply in the economy

Question

Quizplus · Accepted Answer

The slope of the aggregate supply curve is what determines the magnitude of the changes in price level when the central bank takes monetary policy measures that lead to a change in the aggregate demand. If the aggregate supply curve is steep, then even small changes in aggregate demand could lead to large changes in the price level, while if the aggregate supply curve is flat, then large changes in aggregate demand may only lead to small changes in the price level. Therefore, the slope of the aggregate supply curve is a crucial factor in determining the effectiveness of monetary policy.

What Determines the Magnitude of the Changes in Price Level