The closer the economy is to capacity,the greater the risk that fiscal or monetary stimulus will cause

Question

Quizplus · Accepted Answer

When the economy is close to capacity, fiscal or monetary stimulus can increase aggregate demand beyond the economy's ability to produce goods and services, leading to upward pressure on prices (inflation). With no increase in output, the increase in prices means a decrease in real GDP, which is not an option in the given choices. Therefore, option C is the best choice.

The Closer the Economy Is to Capacity,the Greater the Risk