If the economy is on the steep part of its aggregate supply curve, expansionary policy will mostly increase the price level.

Question

Quizplus · Accepted Answer

When the economy is on the steep part of its aggregate supply curve, it means that the economy has limited spare capacity and is producing close to its full potential. Expansionary policies like fiscal stimulus or increasing the money supply can stimulate demand, but due to the limited spare capacity, the increase in demand will mostly translate into higher prices rather than an increase in output. Hence, expansionary policy will mostly increase the price level.

If the Economy Is on the Steep Part of Its