AP Macroeconomics Question 280: Answer and Explanation
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11. Suppose that an expansionary fiscal policy leads to a large increase in real output and a small increase in the price level. From this it can be inferred that
- A. inflation had already impacted the economy before the fiscal stimulus.
- B. the economy initially had some unemployed resources.
- C. aggregate supply decreased.
- D. aggregate demand is steeply sloped.
- E. aggregate supply is steeply sloped.
Correct Answer: B
(B) Expansionary fiscal policy increases aggregate demand. Increases in aggregate demand raise prices and output. However, if there is a lot of unemployment and capacity to begin with, then the increase in aggregate demand can easily be met by increasing output.