Question

Which of the following statements is correct using the AD-AS model (a) the economy is always in equilibrium at full employment (b) the use of fiscal policy to achieve full employment will bring about a rise in price level (c) Monetary policy can be freely used to achieve full employment without risking a rise in the price level (d) Fiscal policy can be freely used to achieve full employment without risking a rise in the price level

Answer 1

(d) Fiscal policy can be freely used to achieve full employment without risking a rise in the price level. This will shift the demand curve to the left and the new output will be at a higher level and higher price.