In an AD-AS model with an upward-sloping AS-curve, the most likely effects of fiscal expansion would be
A)an increase in prices and interest rates, but a decrease in real money balances
B)an increase in output, prices, and real money balances
C)an increase in consumption and a decrease in investment with no change in output
D)a decrease in unemployment but an increase in interest rates and real money balances
E)a decrease in consumption, but an increase in net exports and investment

Question

Quizplus · Accepted Answer

An upward-sloping AS-curve suggests that there is limited spare capacity in the economy, meaning that as output increases, prices and interest rates also increase. Fiscal expansion would increase aggregate demand, causing output to increase, but because of the limited spare capacity, prices and interest rates would increase as well. Real money balances would decrease because higher prices mean that the same amount of money can buy fewer goods and services.

In an AD-AS Model with an Upward-Sloping AS-Curve, the Most