Show the impact of expansionary fiscal policy on a graph and in words in the AD-AS...

Show the impact of expansionary fiscal policy on a graph and in words in the AD-AS model.

If the government continues to increase government spending even after the natural rate of employment is reached, what happens in the AD-AS model. Eventually, what is the price level and employment level.

Expert Solution

The impact of expansionary fiscal policy in the AD-AS model is shown and explained below

If government continues to increase government spending even after the natural rate of employment is reached, the short run equilibrium may end up to the right of long run equilibrium where now there is a inflationary gap. Output is greater than its potential level, there is a demand pull inflation and employment level has increased beyond its natural rate (workers are working over-time)

Rahul Sunny answered 5 months ago

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