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 (Y*)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

Quizplus · Accepted Answer

An increase in government purchases spent on public infrastructure that increases the productivity of private-sector production can lead to an increase in potential output (Y*). This is because increased productivity can lead to greater efficiency and output, which can increase the capacity of the economy to produce goods and services in the long run. Options A, B, D, and E do not necessarily lead to an increase in potential output in the long run.

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