With a steep short-run aggregate supply curve,
A) an increase in taxes that does not change potential GDP will not decrease real GDP by much.
B) fiscal policy will be an effective tool to reduce unemployment without raising prices too much.
C) there is a large change in real GDP whenever the price level rises.
D) an increase in government expenditure will not have an impact on the price level.

Question

Quizplus · Accepted Answer

A steep short-run aggregate supply curve means that changes in the price level have a significant impact on the quantity of goods and services produced. However, the potential GDP, which represents the economy's productive capacity, remains unchanged. Therefore, an increase in taxes that does not affect potential GDP will not decrease real GDP by much because firms will try to maintain their production levels despite the higher costs.

With a Steep Short-Run Aggregate Supply Curve