The Federal Reserve econometric model estimates that a 1 percent increase in government spending, with the money supply held constant, will
A) increase real GDP by 1 percent per year for two years.
B) increase real GDP by 2 percent per year for two years.
C) decrease real GDP by 1 percent per year for two years.
D) have no effect on real GDP.

Question

Quizplus · Accepted Answer

The Federal Reserve's econometric model suggests that a 1 percent increase in government spending, assuming the money supply remains constant, will lead to a corresponding 1 percent increase in real GDP annually for two years. This is based on the multiplier effect, where increased government spending can stimulate economic activity and growth.

The Federal Reserve Econometric Model Estimates That a 1 Percent