The long-run effect of a change in expenditures occurs when
A)a spending balance is achieved.
B)the recovery period begins.
C)interest rates begin to adjust.
D)real GDP is nearly back to equaling potential GDP.
E)the AD line intersects the IA line.

Question

Quizplus · Accepted Answer

The long-run effect of a change in expenditures occurs when real GDP is nearly back to equaling potential GDP. This represents a state of full employment equilibrium, where the economy is producing at its maximum capacity and the only way to increase output is to increase the factors of production. At this point, the economy no longer experiences the temporary fluctuations associated with short-run adjustments to changes in expenditures.

The Long-Run Effect of a Change in Expenditures Occurs When