If the Fed expands the money supply,a short-run aggregate supply curve __________ would yield the largest short-run increase in the price level.
A)that is vertical
B)with a steep slope
C)that coincides with the 45-degree line
D)that is relatively flat
E)that is horizontal

Question

Quizplus · Accepted Answer

A vertical short-run aggregate supply curve means that the quantity of output supplied is fixed, regardless of the price level. If the Fed expands the money supply, this will lead to an increase in aggregate demand, which will shift the aggregate demand curve to the right. With a vertical short-run aggregate supply curve, the increase in aggregate demand will lead to a large increase in the price level, as the quantity of output supplied cannot increase.

If the Fed Expands the Money Supply,a Short-Run Aggregate Supply