... between monetary and fiscal policy. Both policies can be strong or weak dependent on the current position of the economy. In the AD - AS model we see that when prices are flexible there becomes a long run level of national income. As national income increases prices increase and wages so in real terms the level of income stays the same. The only way to increase this long-term level is to increase the real factors such as technology fixed capital and human capital. Monetary and fiscal policy can not effect this long run level. They can only lessen the effects of the business cycle. In a recession Real national income is below the long run level. This recessionary gap may drive down wages and other prices enough to shift the short run aggregate supply curve to the long run level only at a lower price. This rarely occurs and if it does ...

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