If wages adjust fully to price increases in the long run, the full effect of fiscal policy is on
A) output.
B) the price level.
C) both output and the price level.
D) neither output nor the price level.

Question

Quizplus · Accepted Answer

When wages adjust fully to price increases in the long run, the primary effect of fiscal policy shifts towards influencing the price level rather than output. This adjustment process means that any increase in demand resulting from fiscal policy will eventually be absorbed by higher prices rather than changes in real output.

If Wages Adjust Fully to Price Increases in the Long