Fiscal policy is MOST effective if:
A) nominal wages and prices are totally flexible.
B) taxpayers care about how fiscal policy is financed.
C) the economy is hit by a shock to aggregate demand.
D) most resources are fully employed.

Question

Quizplus · Accepted Answer

Fiscal policy is most effective when there is a shock to aggregate demand, such as a recession or inflationary pressures. This is because fiscal policy can directly target these issues by adjusting government spending and taxation levels. In contrast, if resources are fully employed (answer D), fiscal policy may not have much impact on the economy. Nominal wages and prices being totally flexible (answer A) could theoretically make fiscal policy more effective, but such a situation is unlikely to occur in the real world. Taxpayers caring about how fiscal policy is financed (answer B) may influence political support for certain fiscal policies, but it would not necessarily affect the overall effectiveness of the policy itself.

Fiscal Policy Is MOST Effective If