A fiscal expansion will
A)raise both the price level and real income in the long run.
B)reduce both the price level and the real income in the short run.
C)raise real income but leave the price level unaffected in the long run.
D)raise both the price level and real income in the short run.

Question

Quizplus · Accepted Answer

A fiscal expansion involves an increase in government spending and/or a decrease in taxes. This leads to an increase in demand and output in the short run, resulting in higher real income and higher prices. However, in the long run, the increase in demand may be met with an increase in supply, resulting in no change in price level while the real income continues to increase. Therefore, choice D is the best answer as it captures the short-run effects of a fiscal expansion.

A Fiscal Expansion Will