The economy is at potential GDP when people correctly anticipate an increase in government expenditure on goods and services. If the money wage rate adjusts immediately, then
A) real GDP remains at potential GDP, there is no change in the price level, and the real wage rate rises in the short run.
B) real GDP and the price level will increase in the short run, but the real wage rate will fall.
C) real GDP remains at potential GDP.
D) real GDP, the price level, and the real wage rate all increase in the short run.

Question

Quizplus · Accepted Answer

When people correctly anticipate an increase in government expenditure on goods and services and the money wage rate adjusts immediately, real GDP remains at potential GDP. This is because an increase in government expenditure will shift the aggregate demand curve to the right, causing an increase in both real GDP and the price level. However, the immediate adjustment of the money wage rate will offset this increase, resulting in real GDP remaining at its potential level. Therefore, there will be no change in the real wage rate in the short run.

The Economy Is at Potential GDP When People Correctly Anticipate