3. Suppose that the economy is in recession with lower output and price. Now the government uses an expansionary fiscal policy (that is, an increase in government purchases) to bring the economy back to the full-employment level of output. How will the fiscal policy affect the output and price stability if each of the followings occurs?

(a) The government overestimates the full-employment level of output; that is, the revised full-employment level of output is lower than what the Fed believes it to be.

(b) It takes longer for the fiscal policy to be effective (that is, shifts in AD)

than the firms to set lower prices.