Expansionary fiscal policy is very effective in significantly increasing the level of output
A)if the AS-curve is totally price inelastic
B)in the classical case
C)if the economy is close to full employment
D)if the economy is in a recession
E)both A and D

Question

Quizplus · Accepted Answer

Expansionary fiscal policy is most effective when the economy is in a recession because there are idle resources and capacity that can be utilized to increase output without causing inflationary pressures. In contrast, expansionary fiscal policy may be less effective or even harmful if the economy is already at full employment, as it can lead to price increases or crowding out of private investment. Therefore, choice C is incorrect, and choice B is irrelevant since it refers to the classical model which assumes full employment in the long-run. Choice A is also incorrect because a totally price inelastic AS-curve implies that any increase in demand would be fully absorbed by higher prices rather than higher output. Choice E is partly correct, but only D captures the essential condition for the effectiveness of expansionary fiscal policy.

Expansionary Fiscal Policy Is Very Effective in Significantly Increasing the Level