Suppose real and potential GDP are initially equal. If government purchases change, which of the following best explains what will happen first?
A)Potential GDP will change by the same amount as aggregate expenditure.
B)The AD curve will shift.
C)Both the AD curve and the IA line will shift.
D)The IA line will shift.
E)There will be movement along the AD curve.

Question

Quizplus · Accepted Answer

When government purchases change, it will affect aggregate demand (AD) in the economy. As a result, the AD curve will shift, which will cause a movement along the IA (aggregate expenditures) line. Therefore, option B is the correct answer. Option A is incorrect because potential GDP may not change by the same amount as aggregate expenditure due to the presence of economic slack. Option C is incorrect because both the AD curve and IA line will not shift simultaneously. Option D is incorrect because only the IA line will not shift. Option E is incorrect because there will be a shift in the AD curve, leading to a movement along the IA line.

Suppose Real and Potential GDP Are Initially Equal