If the short-run aggregate supply curve is horizontal and the Fed increases the money supply, then:
A) output and employment will increase in the short run.
B) output and employment will decrease in the short run.
C) prices will increase in the short run.
D) prices will decrease in the short run.

Question

Quizplus · Accepted Answer

When the short-run aggregate supply curve is horizontal, it means that the economy is operating at full capacity and any increase in aggregate demand will lead to an increase in output and employment without affecting prices. Therefore, if the Fed increases the money supply, it will shift the aggregate demand curve to the right and result in an increase in output and employment in the short run, while prices remain unchanged.

If the Short-Run Aggregate Supply Curve Is Horizontal and the Fed