The steeper the short-run aggregate supply curve over the relevant range, the more contractionary monetary policy will reduce prices and the less it will decrease real output.

Question

Quizplus · Accepted Answer

If the short-run aggregate supply curve is steep, it means that the economy is operating close to its potential output and there is little slack in the economy. Therefore, if monetary policy is contractionary and reduces aggregate demand, the resulting decrease in output will be small, but there will be a significant decrease in prices as firms have less room to adjust their output in response to lower demand. On the other hand, if the short-run aggregate supply curve is flat, meaning there is more slack in the economy, a contractionary monetary policy will result in a larger decrease in output and a smaller decrease in prices.

The Steeper the Short-Run Aggregate Supply Curve Over the Relevant