On the basis of both theory and empirical evidence, most economists believe that changes in fiscal policy have
A)powerful effects on real GDP and factor prices both in the short run and in the long run.
B)important short- run effects on real GDP and factor utilization but are less effective in changing potential GDP in the long run.
C)no effect on factor utilization in the short run or on factor prices in the long run.
D)long- run effects on potential GDP but have little impact on short- run real GDP.
E)major effects on the incentive to save in the short run.

Question

Quizplus · Accepted Answer

Most economists believe that changes in fiscal policy can have important short-run effects on real GDP and factor utilization, but they are less effective in changing potential GDP in the long run. This is because potential GDP is primarily determined by the economy's supply-side factors such as labor force, capital stock, and technology, which are not significantly affected by changes in fiscal policy. However, fiscal policy can affect the demand side and therefore real GDP in the short run through changes in government spending, taxes, and transfer payments, which can impact consumer and business confidence, consumption, investment, and net exports. Fiscal policy can also have some influence on factor utilization in the short run through targeted spending or tax policies that incentivize certain sectors or activities. However, these effects tend to be transitory and fade away as the economy adjusts to the new policy regime.

On the Basis of Both Theory and Empirical Evidence, Most