The short- run multiplier is equal to 3, real GDP equals potential GDP of $8,000, and the price level is equal to 100. Suppose that government expenditures decrease by $200. The long- run effect of the decrease in government expenditures on real GDP is to change real GDP by

Question

Quizplus · Accepted Answer

In the long run, the economy will reach potential GDP regardless of short-term shocks such as changes in government expenditures. Therefore, the change in government expenditures will not have a long-run effect on real GDP. Thus, there will be no change in the long-run real GDP.

The Short- Run Multiplier Is Equal to 3, Real GDP