Question

Suppose the economy is initially operating well below capacity. In this​ case, an expansionary macroeconomic policy will result in

A. equal increases in prices and output.
B. a small price increase relative to the output increase.
C. a small output increase relative to the price increase.
D. runaway inflation.

Answer 1

The correct answer is option B.

Step-by-step explanation:

If an economy is working well below capacity this means there is huge amount of unused resources left. Resources or inputs at this point will be available at a relatively lower price. So the firms will be able to expand output at a cheaper rate.

When the demand for inputs increase the input price will not increase much. So, the firms will be able to increase output and the price level will not increase by a great extent.