If aggregate supply meets aggregate demand in the vertical part of the AS curve,which of the following is a true statement about expansionary policies?
A)Monetary policy will be more effective in increasing output.
B)Fiscal policy will be more effective in increasing output.
C)Fiscal and monetary policy will be equally effective in increasing output.
D)Both monetary and fiscal policies will only cause prices to increase.

Question

Quizplus · Accepted Answer

If aggregate supply meets aggregate demand in the vertical part of the AS curve, it means that the economy has reached full employment, and there is no excess capacity. Therefore, any expansionary policies, either fiscal or monetary, will only cause prices to increase, and not output. This is known as the phenomenon of demand-pull inflation. Thus, option D is the correct answer.

If Aggregate Supply Meets Aggregate Demand in the Vertical Part