The closer the economy is to capacity,the greater the risk that fiscal or monetary stimulus will cause

Question

Quizplus · Accepted Answer

When the economy is close to capacity, any fiscal or monetary stimulus is likely to increase demand in the economy, which would result in an increase in the price level due to higher levels of aggregate demand chasing limited supply. However, since the economy is already close to capacity, there may not be enough spare resources to increase output significantly, so there may be no change in output. Therefore, the best choice is C - an increase in the price level and no change in output.

The Closer the Economy Is to Capacity,the Greater the Risk