Increasing aggregate demand with fiscal policy may have undesirable inflationary consequences.

Question

Quizplus · Accepted Answer

When aggregate demand is increased by fiscal policy, it can lead to an increase in prices (inflation) if there is not enough capacity in the economy to meet the increased demand. This is because higher demand leads to higher prices, especially if the supply of goods and services is limited. Therefore, fiscal policy may have undesirable inflationary consequences.

Increasing Aggregate Demand with Fiscal Policy May Have Undesirable Inflationary