Question

As prices adjust, typically the long-run real impact of expansionary monetary policy is:

a) Inflationary
b) Deflationary
c) Neutral
d) Uncertain

Answer 1

The long-run real impact of expansionary monetary policy is typically inflationary, leading to increased price levels once the economy reaches its potential GDP.

Step-by-step explanation:

The long-run real impact of expansionary monetary policy is typically inflationary. During times of recession, an expansionary monetary policy can reduce interest rates, encouraging borrowing and investment, which shifts aggregate demand to the right.

Over time, as the equilibrium moves from Eo to E1, the economy sees a higher price level and increased real GDP until it reaches its potential GDP. Once the potential GDP is reached, further expansionary policy primarily causes inflation without affecting the real output.