Suppose the short-run aggregate supply curve has a positive slope.And suppose an effective fiscal policy to correct for an expansionary gap effect is implemented.What variable will be affected?

A) only the price level, which will fall
B) only real GDP, which will fall
C) only the price level, which will rise
D) the price level and real GDP, both of which will fall

Question

Suppose the short-run aggregate supply curve has a positive slope.And suppose an effective fiscal policy to correct for an expansionary gap effect is implemented.What variable will be affected?
 
A) only the price level, which will fall 
B) only real GDP, which will fall 
C) only the price level, which will rise 
D) the price level and real GDP, both of which will fall

Quizplus · Accepted Answer

If the short-run aggregate supply curve has a positive slope, it means that the economy is operating below full employment. To correct for this expansionary gap, an effective fiscal policy can be implemented, such as decreasing government spending or raising taxes. This will decrease aggregate demand, shifting it leftward, which will lead to a decrease in both the price level and real GDP. Therefore, the correct answer is D, the price level and real GDP, both of which will fall.

Suppose the Short-Run Aggregate Supply Curve Has a Positive Slope