The use of government purchases (G)as a fiscal policy tool can have an effect on long-run growth in the economy.Under what circumstances might an increase in G cause the level of potential output ( )to increase?
A)If the increase in G crowds out private investment.
B)If the increase in G causes a permanent increase in the marginal propensity to consume,which causes a permanent rightward shift of the AD curve.
C)If the increase in G is spent on public infrastructure that increases the productivity of private-sector production.
D)If the increase in G leads to a permanent increase in the level of autonomous saving in the economy.
E)If the increase in G is offset by an equal decrease in C,I,and NX.

Question

The use of government purchases (G)as a fiscal policy tool can have an effect on long-run growth in the economy.Under what circumstances might an increase in G cause the level of potential output (  )to increase?
A)If the increase in G crowds out private investment. 
B)If the increase in G causes a permanent increase in the marginal propensity to consume,which causes a permanent rightward shift of the AD curve. 
C)If the increase in G is spent on public infrastructure that increases the productivity of private-sector production. 
D)If the increase in G leads to a permanent increase in the level of autonomous saving in the economy. 
E)If the increase in G is offset by an equal decrease in C,I,and NX.

Quizplus · Accepted Answer

If the increase in government purchases is spent on public infrastructure that increases the productivity of private-sector production, it can lead to an increase in potential output in the long run. This is because increased productivity can lead to an increase in the capacity of the economy to produce goods and services. Additionally, if the increase in government purchases is offset by a decrease in consumption, investment, and net exports, it may not have an effect on potential output. However, the other options do not necessarily lead to an increase in potential output. Crowding out of private investment (option A) can actually decrease potential output in the long run, while a permanent increase in the marginal propensity to consume (option B) may only lead to a short-term increase in output. A permanent increase in the level of autonomous saving (option D) may lead to a decrease in consumption and aggregate demand, which can decrease output in the short run.

The Use of Government Purchases (G)as a Fiscal Policy Tool