Question

If the aggregate supply curve is flat:_________
a. contractionary fiscal or monetary policy will cause significantly less inflation.
b. expansionary fiscal or monetary policy will add significantly to real GDP will little effect on inflation.
c. expansionary fiscal or monetary policy will add little to real GDP but will increase inflation significantly.
d. contractionary fiscal or monetary policy will reduce inflation with little effect on real GDP.

Answer 1

Answer:

b. expansionary fiscal or monetary policy will add significantly to real GDP will little effect on inflation.

Explanation:

The Keynesian aggregate supply curve is mostly horizontal (flat) because a decline in aggregate demand will always result in a decline in aggregate production (supply). In other words, during a recession, companies are willing to supply (produce and sell) all the products and services that their consumers demand at a given price. Even if the price does not change, if aggregate demand decreases, aggregate supply will also decrease.  

That is why Keynesian economists argue that governments must intervene during economic recessions.