Fiscal stimulus is most effective in changing the level of real output without causing inflation when the aggregate supply curve is:
A) Horizontal.
B) Vertical.
C) Upward sloping to the right.
D) Downward sloping to the right.

Question

Quizplus · Accepted Answer

When the aggregate supply curve is horizontal, it means that the economy is producing below its potential output and there is excess capacity, leading to unused resources. In this case, fiscal stimulus can increase aggregate demand without causing inflation because there is spare capacity that can be utilized to produce more output. As a result, the increase in demand will lead to an increase in real output without causing inflationary pressure.

Fiscal Stimulus Is Most Effective in Changing the Level of Real