If the aggregate supply curve is horizontal, an expansionary fiscal policy will increase real output by less than if the aggregate supply curve is upward sloping.

Question

Quizplus · Accepted Answer

When the aggregate supply curve is horizontal, it indicates that the economy is in a situation where there are idle resources and output can be increased without leading to inflation. In such a scenario, expansionary fiscal policy can increase real output without causing prices to rise, and the increase in output can be more significant compared to when the aggregate supply curve is upward sloping. When the curve is upward sloping, increasing demand through expansionary fiscal policy can lead to higher prices and potentially less increase in real output due to inflationary pressures.

If the Aggregate Supply Curve Is Horizontal, an Expansionary Fiscal