Using the AD-AS model, an increase in government expenditure
A) has no impact on real GDP, but will increase potential GDP.
B) increases both real GDP and the price level.
C) has no impact on real GDP.
D) has a full multiplier effect on real GDP, leaving the price level unchanged in the long run.

Question

Quizplus · Accepted Answer

An increase in government expenditure will shift the aggregate demand (AD) curve to the right, leading to an increase in both real GDP and the price level in the short run. In the long run, however, the economy will adjust to the new equilibrium point on the AD-AS graph, where the increase in potential GDP will lead to a higher level of output, but prices will ultimately return to their original level. Therefore, there will be an increase in both real GDP and the price level, but only in the short run.

Using the AD-AS Model, an Increase in Government Expenditure