Question

Under full employment, a temporary fiscal expansion would increase output (over-employment) but cannot increase output in the long run?

1) True
2) False

Answer 1

A temporary fiscal expansion can increase output in the short run but cannot sustainably increase output in the long run.

Step-by-step explanation:

In the short run, a temporary fiscal expansion under full employment can increase output, also known as over-employment. However, in the long run, fiscal policy cannot sustainably increase output above potential GDP without causing inflation. This is because when the economy is already at full employment, any increase in aggregate demand will only lead to higher prices, rather than an increase in output.