When the economy is at the full employment level of real GDP, expansionary fiscal policy will not increase the economy's total output in the long run.

Question

Quizplus · Accepted Answer

When the economy is at full employment, increasing government spending or decreasing taxes through expansionary fiscal policy will increase aggregate demand in the short run. However, since the economy is already producing at its maximum capacity, the increased demand will lead to higher prices rather than higher output. Therefore, in the long run, expansionary fiscal policy will not increase total output.

When the Economy Is at the Full Employment Level of Real