Suppose that the economy is in recession with lower output and price. Now the government uses an expansionary fiscal policy (i.e., 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; i.e., the revised full-employment level of output is lower than what the Fed believes it to be.

(b) It takes longer time for the fiscal policy to be effective (i.e., shifts in \(A D\) ) than the firms to set lower prices.