Question

Briefly explain how the effectiveness of both, expansionary and contractionary fiscal policy would be affected by the price of elasticity of aggregate supply.

Answer 1

Answer - In the expansionary policy the prices increase and in contractionary policy the prices decreases. The aggregates need to adjust to these changes in order to make these policies effectives. In other words , in expansionary policy , if the supply does not increase with increase in price , and vice a versa in case of contractionary policy , the policy will be ineffective because then the equilibrium will not be established. Hence the supply must be elastic in order to make influnece upon the economy. The inelastic supply will make the policy ineffective.