Fiscal policy is MOST effective in keeping both inflation and real growth stable when there is a:
A) shock to the LRAS curve.
B) shock to aggregate demand.
C) real shock.
D) change in expected inflation that shifts the SRAS curve.

Question

Quizplus · Accepted Answer

Fiscal policy, such as changes in government spending and taxation, can be used to stabilize aggregate demand when there is a shock to it. This helps to stabilize both inflation and real growth. On the other hand, a shock to the LRAS curve or a real shock would not be as effectively addressed by fiscal policy alone. Similarly, changes in expected inflation that shift the SRAS curve can be addressed with monetary policy rather than fiscal policy.

Fiscal Policy Is MOST Effective in Keeping Both Inflation and Real