Question

1. why would a government want to use expansionary fiscal policy to help stimulate aggregate demand if, in the long run, we would expect prices to adjust and the economy to return to its long - run equilibrium on its own?

o b. it could take a long time for prices to adjust by market forces alone.
o d. when prices adjust during a recession, we see increases in inflation.
o a expansionary fiscal policy always works in stimulating aggregate demand.
o c expansionary fiscal policy has no adverse effects on the economy.
o e expansionary fiscal policy is easy to get approved by congress and the president.

Explanation:

According to classical economic theory, in the long - run, prices are flexible. When there is a recession, without government intervention (using expansionary fiscal policy), market forces will adjust. It takes time for these market - based price adjustments to occur. Expansionary fiscal policy is not always effective (so option a is wrong), it can have adverse effects like crowding out (so option c is wrong), getting it approved is not easy (so option e is wrong), and during a recession, relying on just price adjustments (without policy) doesn't lead to inflation in the long - run as prices will adjust to equilibrium (so option d is wrong).

Answer:

B. It could take a long time for prices to adjust by market forces alone.