Assume that real and potential GDP are initially equal. If government purchases permanently increase, we would expect that in the short run
A)consumption and investment will be higher than baseline, and net exports will be lower.
B)consumption will be higher than baseline, and net exports and investment will be the same.
C)consumption, investment, and net exports will be higher than baseline.
D)consumption and net exports will be higher than baseline, and investment will be the same.
E)consumption will be higher than baseline, net exports will be lower, and investment will be the same.

Question

Quizplus · Accepted Answer

When government purchases permanently increase, consumption may increase due to the multiplier effect, but net exports tend to decrease due to a stronger domestic currency making exports more expensive. Investment typically remains the same in the short run as the increase in government spending doesn't directly affect it.

Assume That Real and Potential GDP Are Initially Equal