Related to the Economics in Practice on p. 558: A monsoon destroyed 80% of the Gregorian manufacturing base. The Gregorian government decided to use an expansionary fiscal policy to counter the effects of the monsoon on the economy. The use of the expansionary fiscal policy would have caused
A) the price level to be lower and the output level to be higher than they would have been without the policy action.
B) both the price level and the output level to be higher than they would have been without the policy action.
C) both the price level and output level to be lower than what they would have been without the policy action.
D) the price level to be higher and the output level to be lower than they would have been without the policy action.

Question

Quizplus · Accepted Answer

An expansionary fiscal policy involves government spending increases or tax cuts, which would increase aggregate demand (AD) in the economy. Due to the destruction of the manufacturing base, the economy would have been operating at a point below full employment equilibrium. Therefore, the increase in AD would lead to an increase in output level (Y) and also an increase in price level (P) as firms face more demand for their products. Hence, both the price level and output level would be higher than they would have been without the policy action.

Related to the Economics in Practice on P