Answer to Question #96868 in Macroeconomics for Tiffany

Question

The federal government notices the economy is heading into a recession, and determines to engage in expansionary fiscal policy. However, six months later, when the policy is enacted the economy is enjoying very low unemployment. What happens?
A. The economy must still be in a recession, since it's been only six months, so the expansionary policy will pull the economy out of the recession.
B. The expansionary policy causes an initial increase in AD, which leads to a decrease in AS.
C. The expansionary policy causes the price level to fall.
D. The expansionary fiscal policy shifts the long-run AS curve to the left.
The expansionary fiscal policy shifts the long-run AS curve to the right.

Answer 1

If six months later, when the policy is enacted the economy is enjoying very low unemployment, then the reason is that expansionary policy caused an initial increase in AD, which led to a decrease in AS.

So, the correct answer is B.