Fiscal policy is most effective in keeping both inflation and real growth stable when there is a

Question

Quizplus · Accepted Answer

Fiscal policy is most effective in stabilizing the economy during a shock to aggregate demand. This is because fiscal policy tools, such as government spending and taxation, directly affect aggregate demand. When aggregate demand is in a state of shock, either due to a decrease in consumer confidence or a decrease in investment, fiscal policy can be used to stimulate demand and stabilize economic growth. Inflation can also be managed through fiscal policy by adjusting taxation and government spending to keep prices stable. Shocks to the Solow growth curve or real shocks are typically beyond the control of fiscal policy, but changes in expected inflation that shift the SRAS curve can be managed through fiscal policy.

Fiscal Policy Is Most Effective in Keeping Both Inflation and Real