Which of the following explains why the government should not increase spending by the entire amount of the AD shortfall to move the economy to full employment?

Question

Quizplus · Accepted Answer

Increasing government spending by the entire amount of the AD shortfall will result in an inflationary gap as the multiplier process will contribute to an additional increase in aggregate demand. This can cause the price level to increase beyond the desired level leading to inflation, which can be worse than the initial recessionary gap. Therefore, the government should be cautious and only increase spending to the extent necessary to fill the AD shortfall.

Which of the Following Explains Why the Government Should Not