According to economic theory, how does fiscal policy affect the output and price level in an economy?
A) The policy shifts the aggregate demand curve, which leads to new short-run equilibrium output and price levels.
B) The policy shifts the long-run aggregate supply curve, which leads to a new long-run equilibrium.
C) The policy shifts the short-run aggregate supply curve, which leads to new short-run equilibrium output and price levels.
D) The policy shifts the short-run aggregate supply curve, which leads to a new short-run equilibrium price level with no impact on output.

Question

Quizplus · Accepted Answer

Fiscal policy, which involves government spending and taxation, primarily affects the economy by shifting the aggregate demand curve. This shift leads to changes in the short-run equilibrium output and price levels.

According to Economic Theory, How Does Fiscal Policy Affect the Output