If wages adjust fully to price increases, fiscal policy will have no effect on output in the long run.

Question

Quizplus · Accepted Answer

In the long run, wages will adjust to price increases, which means that there will be no real effects on output due to fiscal policy. This is because any increase in government spending or reduction in taxes will simply lead to higher prices, which will in turn be offset by higher wages. Therefore, fiscal policy cannot permanently change the level of output in the economy in the long run.

If Wages Adjust Fully to Price Increases, Fiscal Policy Will