If the short-run aggregate supply curve is horizontal, then the:
A) classical dichotomy is satisfied.
B) money supply cannot affect prices in the short run.
C) money supply cannot affect output in the short run.
D) money supply is irrelevant in the short run.

Question

Quizplus · Accepted Answer

If the short-run aggregate supply curve is horizontal, it means that there is excess capacity in the economy and firms are willing to supply any amount of output at the current price level. In this case, an increase in the money supply will not lead to an increase in prices as there is no upward pressure on prices due to excess supply. This implies that the money supply cannot affect prices in the short run.

If the Short-Run Aggregate Supply Curve Is Horizontal, Then The