Question

Fiscal policy is more effective in affecting economic activity if: A. Many resources are unemployed B. There is a real shock instead of an aggregate demand shock C. The economy returns to its long-run potential growth rate almost immediately D. There is a long implementation lag

Answer 1

C. The economy returns to its long-run potential growth rate almost immediately.

(Fiscal policy shifts aggregate demand curve due to which economy can return to its long run potential growth rate almost immediately. It can work effcetively in case of both unemployed resources or overemployed resources. It works more effectiveky when there is aggregate demand shock as it balances the economy through altering the demand. If there is a long implementation lag, then this policy would lose its importance as structural changes would take place so this policy won't be effective. So, fiscal policy is more effective in affecting economic activity if the economy returns to its long-run potential growth rate almost immediately.)