If the economy is on the flat part of the aggregate supply curve, contractionary fiscal policy works well to decrease the price level with little decrease output.

Question

Quizplus · Accepted Answer

If the economy is on the flat part of the aggregate supply curve, it means that the economy is in a recessionary gap with high unemployment and low output. In this situation, contractionary fiscal policy may lead to further decrease in output along with a decrease in the price level. Therefore, it is not an effective policy option in this scenario.

If the Economy Is on the Flat Part of the Aggregate