If the GDP gap is $400 billion and AS is upward-sloping,an effective fiscal policy would be to increase aggregate demand by $400 billion.
With an upward-sloping aggregate supply curve,if aggregate demand increased by the amount of the recessionary GDP gap,the economy would fall short of full employment.Some of the increased demand pushes up prices instead of output.To reach full-employment equilibrium,the AD curve must shift by an amount greater than the GDP gap,the amount of the entire AD shortfall.

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An effective fiscal policy would require increasing aggregate demand by more than $400 billion because with an upward-sloping AS curve, some of the increased demand will lead to higher prices rather than increased output.

If the GDP Gap Is $400 Billion and AS Is