Suppose, for a certain economy, real and potential GDP are initially equal. Then government purchases permanently increase. Compared to the baseline, we would expect to see, in the medium run,
A)a decrease in consumption and an increase in both net exports and investment.
B)a decrease in consumption, investment, and net exports.
C)an increase in consumption, a decrease in net exports, and no change in investment.
D)an increase in consumption and net exports and a decrease in investment.
E)an increase in consumption and a decrease in both net exports and investment.

Question

Quizplus · Accepted Answer

When government purchases permanently increase, it leads to higher demand in the economy. This can cause an increase in interest rates as the government competes for funds, which in turn discourages investment. Higher domestic demand can also lead to an increase in imports, decreasing net exports. Consumption may increase due to the multiplier effect of increased government spending.

Suppose, for a Certain Economy, Real and Potential GDP Are