When the economy is at full employment, expansionary fiscal policy results in a new long-run equilibrium at an output level _____ full employment and a _____ price level.

Question

Quizplus · Accepted Answer

Expansionary fiscal policy increases aggregate demand, which leads to an increase in output and prices. At full employment, the economy is already producing at its maximum capacity, so an increase in aggregate demand will only lead to higher prices.

When the Economy Is at Full Employment, Expansionary Fiscal Policy