Starting from long-run equilibrium, a war that raises government purchases results in ________ output in the short run and ________ output in the long run.
A)higher; higher
B)higher; potential
C)lower; potential
D)lower; higher

Question

Quizplus · Accepted Answer

An increase in government purchases is an example of an exogenous increase in spending, which shifts aggregate demand right and increases the short-run equilibrium. As a result of this expansionary gap, inflation will gradually increase, thereby shifting the SRAS line upward. When inflation has risen enough, the economy is back in long-run equilibrium at potential output.

Starting from Long-Run Equilibrium, a War That Raises Government Purchases