Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be relatively ________ and real GDP to be relatively ________.
A)higher; higher
B)higher; lower
C)lower; higher
D)lower; lower

Question

Quizplus · Accepted Answer

Expansionary monetary policy, such as lowering interest rates and increasing the money supply, aims to increase aggregate demand and stimulate economic activity, which could lead to higher real GDP. However, if the economy is already operating at or near full capacity (potential real GDP), the increase in aggregate demand could result in higher prices and inflation. Therefore, the inflation rate is relatively higher, while real GDP is relatively higher as well.

Expansionary Monetary Policy to Prevent Real GDP from Falling Below