What is the impact of fiscal stimulus on GDP and price level?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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The answer to this will depend to a large extent on where the economy is on the aggregate supply curve.

If the economy is in the Keynesian range of the AS curve, the fiscal policy will increase GDP without increasing the price level.  This is because, in that range, the AS curve is flat.

If the economy is in the intermediate range of the AS curve, the fiscal stimulus will increase both GDP and the price level.  The AS curve is upward slanting in this range.

If the economy is in the classical range of the AS curve, a fiscal stimulus will result in no increase in GDP but it will raise the price level.  In this range, the AS curve is vertical.

So, the impact that a policy of fiscal stimulus will have on GDP and price level depends mostly on where the economy is on the AS curve.

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