Suppose there is an increase in government spending. Such a fiscal policy action will cause:
A) the natural level of output to rise.
B) the natural level of output to fall.
C) ambiguous effects on the natural level of output.
D) no effect on the natural level of output.
E) the natural level of output rises when the natural real interest rate falls.

Question

Quizplus · Accepted Answer

An increase in government spending is a fiscal policy action that affects the economy's demand side, not its supply side. The natural level of output, also known as potential output, is determined by supply-side factors such as technology, resources, and the labor force. Therefore, changes in government spending do not directly affect the natural level of output.

Suppose There Is an Increase in Government Spending