Fiscal policy will affect prices and interest rates but not the level of output if
A)the AD-curve is vertical
B)the AS-curve is vertical
C)the AD-curve is horizontal
D)the AS-curve is horizontal
E)both A)or D)

Question

Quizplus · Accepted Answer

If the AS-curve is vertical, then changes in fiscal policy will only affect prices and interest rates, but not the level of output. This is because the vertical AS-curve indicates a fixed level of potential output that cannot be increased or decreased in response to changes in aggregate demand. Fiscal policy can only shift the AD-curve, leading to changes in prices and interest rates, but not output.

Fiscal Policy Will Affect Prices and Interest Rates but Not