Starting from long-run equilibrium, a large increase in government purchases will result in a(n) ______gap in the short run and ____inflation and ____output in the long run.
A)expansionary; higher; potential
B)expansionary; lower; potential
C)expansionary; higher; higher
D)recessionary; higher; lower

Question

Quizplus · Accepted Answer

In the short run, increased government purchases create an expansionary gap by boosting demand. In the long run, this leads to higher inflation as prices adjust, but output returns to its potential level.

Starting from Long-Run Equilibrium, a Large Increase in Government Purchases