Which of the following statements about fiscal policy is TRUE?

Question

Quizplus · Accepted Answer

Fiscal policy can be used to shift the aggregate demand curve, which affects real GDP in the short run. However, in the long run, the economy will return to its long-run equilibrium level of output, so real GDP cannot be sustained above its potential level. Therefore, option A is the correct statement. Option B is incorrect because although real GDP cannot be sustained above its long-run equilibrium level, it can temporarily increase above this level in the short run. Options C and D are also incorrect because increasing government spending shifts the aggregate demand curve outward, while reducing spending shifts it inward.

Which of the Following Statements About Fiscal Policy Is TRUE