Taking into account the upward- sloping short- run aggregate supply curve, the short- run effect of an increase in government expenditures on real GDP is that

Question

Quizplus · Accepted Answer

An increase in government expenditures will shift the aggregate demand curve to the right, and in the short run, it will result in an increase in both the price level and real GDP. This is because firms are willing to increase production and hire more workers to accommodate the increase in demand. However, as output approaches its potential level, wages and resource prices will increase, causing the short-run aggregate supply curve to shift upward, and the economy will move back toward its initial equilibrium. In the long run, real GDP will increase by less as compared to the short run due to the impact of the upward-sloping short-run aggregate supply curve. Hence, option C is correct.

Taking into Account the Upward- Sloping Short- Run Aggregate Supply