A contractionary monetary policy is most likely to reduce output with little impact on inflation when the economy

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In an economy with substantial unemployment and a horizontal aggregate supply curve, a contractionary monetary policy is likely to have little impact on inflation because there is excess capacity and firms will not have the power to pass on any cost increases from higher interest rates to consumers. However, in this scenario, the contractionary policy may reduce output if it leads to decreased borrowing and investment, which may worsen unemployment.

A Contractionary Monetary Policy Is Most Likely to Reduce Output