Expansionary aggregate demand-oriented fiscal policy leads, ceteris paribus, to
A) a short-run fall in both income and the price level.
B) a short-run rise in income and a fall in the price level.
C) no change in the long-run equilibrium level of income and to an increase in the price Level.
D) both an increase in the long-run equilibrium level of income and an increase in the Price level.

Question

Quizplus · Accepted Answer

Expansionary aggregate demand-oriented fiscal policy, such as increased government spending or tax cuts, typically does not change the long-run equilibrium level of income due to the economy's return to its potential output, but it does lead to an increase in the price level in the short run due to higher demand.

Expansionary Aggregate Demand-Oriented Fiscal Policy Leads, Ceteris Paribus, to