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) expansionary; higher; lower

Question

Quizplus · Accepted Answer

In the short-run, increased government purchases create an expansionary gap by boosting aggregate demand, leading to higher inflation. In the long-run, output returns to its potential level as the economy adjusts.

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