If the short-run aggregate supply curve has a positive slope,effective fiscal policy to correct for an expansionary gap will
A)only reduce the price level
B)only reduce real GDP
C)only increase the price level
D)only increase real GDP
E)reduce both the price level and real GDP

Question

Quizplus · Accepted Answer

If the short-run aggregate supply curve has a positive slope, then an expansionary gap occurs when real GDP is above potential GDP and the price level is higher than the expected level. To correct this, fiscal policy can be used to decrease aggregate demand, which can result in a decrease in both the price level and real GDP. Therefore, the best choice is E, which states that effective fiscal policy will reduce both the price level and real GDP.

If the Short-Run Aggregate Supply Curve Has a Positive Slope,effective