Fiscal policy is likely to fail to correct stagflation in an economy because _____
A) it affects both the aggregate demand and supply, but only aggregate supply needs to be changed.
B) it affects both the aggregate demand and supply, but only aggregate demand needs to be changed.
C) it affects aggregate demand only, but aggregate supply also needs to changed.
D) it affects aggregate supply only, but only aggregate demand needs to be changed.
E) it affects either aggregate demand or aggregate supply, but both need to be changed simultaneously.

Question

Quizplus · Accepted Answer

Fiscal policy primarily influences aggregate demand through government spending and taxation. However, to address stagflation, which involves both high inflation and high unemployment (indicating issues with both aggregate demand and supply), adjustments to both aggregate demand and supply are necessary. Fiscal policy's limitation to primarily affecting demand means it may not fully correct stagflation, as changes to aggregate supply are also needed.

Fiscal Policy Is Likely to Fail to Correct Stagflation in an Economy