With a steep short-run aggregate supply curve
A) an increase in government expenditure will not have an impact on the price level.
B) fiscal policy will be an effective tool to reduce unemployment without raising prices too much.
C) an increase in taxes that does not change potential GDP will not decrease real GDP by much.
D) there is a large change in real GDP whenever the price level rises.

Question

Quizplus · Accepted Answer

When the short-run aggregate supply curve is steep, changes in aggregate demand, such as those caused by fiscal policy adjustments (like tax increases that do not affect potential GDP), have a smaller effect on real GDP and a larger effect on the price level. This means that an increase in taxes that does not change potential GDP will not decrease real GDP by much, because the economy is operating at a level where resources are nearly fully utilized, and increases in demand primarily raise prices rather than output.

With a Steep Short-Run Aggregate Supply Curve