Question

Equilibrium is where aggregate supply meets aggregate demand. Suppose the equilibrium is in the vertical part...

Equilibrium is where aggregate supply meets aggregate demand. Suppose the equilibrium is in the vertical part of the aggregate supply curve. What is the economic result of expansionary​ policies?

A. Fiscal policy will be more effective in increasing output.

B. Monetary policy will be more effective in increasing output.

C. Both monetary and fiscal policies will only cause prices to increase.

D. Fiscal and monetary policy will be equally effective in increasing output.

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Answer #1

If the equilibrium is in the vertical part of the aggregate supply curve, then the expansionary monetary and fiscal policy to increase aggregate demand will not be able to affect the output in the economy and will cause only prices to increase.

Over the vertical part of the aggregate supply curve, both Expansionary monetary and fiscal policies are ineffective in increasing the output in the economy and in an attempt to increase the output, they only cause the prices to increase.

Hence, option C is correct.

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