Supply-side policy with fiscal budget impact

Steps:

• Define supply-side policy: Measures increasing long-run aggregate supply (LRAS) via productivity or incentives.
• Identify fiscal consequences: Government spending changes affecting budget deficits or inflation.
• Analyze options: Check for supply-side LRAS effects combined with fiscal spending and short-term AD impacts.
• Select option linking supply-side benefits to fiscal inflationary risks.

Why C is correct:

• Fiscal policy definition: Increased government spending boosts supply-side effects (e.g., infrastructure for LRAS) but raises short-term inflationary pressure via higher AD, per AD-AS model.

Why the others are wrong:

• A: Ignores fiscal inflationary risks, focusing only on long-run benefits without budget consequences.
• B: Emphasizes dual LRAS and AD expansion but overlooks specific fiscal inflationary trade-off.
• D: Describes only short-term AD effect, missing supply-side LRAS focus.

Final answer: C