Question

If prices are inflexible, monetary policy: A. affects nominal income but not real income. B. affects...

If prices are inflexible, monetary policy:

A. affects nominal income but not real income.

B. affects both nominal and real income.

C. does not affect real or nominal income.

D. affects real income but not nominal income.

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Answer #1

The correct answer is (B) affects both nominal and real income.

Inflexible prices means that Price adjust slowly and hence (aggregate supply)AS curve is upward sloping and not Vertical. Change in monetary policy means that there will be change money supply which results in shift in LM curve and this result in change in AD and shift in (aggregate demand)AD curve. As prices are flexible and hence AS curve is upward sloping and not vertical. Hence This will result on change in both prices and Real Output. Thus Real Income will change and as nominal GDP or Income = Real GDP* Price level => Nominal GDP will also change.

Hence, the correct answer is (B) affects both nominal and real income..

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