The diagram shows the effect of expansionary fiscal policy when the economy is operating near full capacity. What is the most likely outcome?

Assessment: Economics 0455 | Paper 1 Mock 01 | Multiple Choice Subject: Economics - 0455

Question 1 Report

diagram The diagram shows the effect of expansionary fiscal policy when the economy is operating near full capacity. What is the most likely outcome?

Answer Details

When the economy is near full capacity, the aggregate supply curve is steep. An increase in aggregate demand leads to a large rise in prices but only a small increase in output, as there are few spare resources to bring into production.

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