Fiscal policy is:
A) equally effective in dealing with real shocks as with aggregate demand shocks.
B) more effective in dealing with real shocks than with aggregate demand shocks.
C) less effective in dealing with real shocks than with aggregate demand shocks.
D) not effective in dealing with either real shocks or aggregate demand shocks.

Question

Quizplus · Accepted Answer

Fiscal policy is less effective in dealing with real shocks because they are shock to the supply side of the economy, and fiscal policy mainly deals with managing demand. On the other hand, fiscal policy can be more effective in dealing with aggregate demand shocks, where the policy can be implemented to either increase or decrease the aggregate demand to stabilize the economy.

Fiscal Policy Is