Answer to Question #76309 in Macroeconomics for mish

Question

Assume an economy in recession but close to full potential. The economy can be
stimulated by using either fiscal policy or monetary policy. Which policy would
be more effective? Be sure to provide relevant economic explanations.

Answer 1

If the economy is in recession and close to full potential, then fiscal policy will be more effective, because it will not cause an increase in price level and high level of inflation.