When real GDP is less than potential GDP, an increase in government expenditures will real GDP and _ the price level.
A) decrease; raise
B) increase; lower
C) decrease; lower
D) increase; raise

Question

Quizplus · Accepted Answer

When real GDP is less than potential GDP, there is a slack in the economy. An increase in government expenditures will increase demand and hence, increase real GDP. As the economy reaches full capacity, the price level will rise. Therefore, an increase in government expenditures will increase real GDP and raise the price level.

When Real GDP Is Less Than Potential GDP, an Increase