If the economy is on the flat part of the aggregate supply curve, expansionary fiscal policy works well to increase output with little increase in the price level.

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When the economy is on the flat part of the aggregate supply curve (i.e. the horizontal portion), there is spare capacity in the economy and resources are not fully utilized. In this situation, an increase in government spending or a decrease in taxes (expansionary fiscal policy) can stimulate demand and increase output. As there is no upward pressure on prices due to spare capacity, the increase in output can be achieved with little increase in the price level.

If the Economy Is on the Flat Part of the Aggregate