Suppose that the government increases spending more than is necessary to close a recessionary gap. What is the MOST likely result?
A) Inflation will increase.
B) The price level will decline.
C) The equilibrium real GDP will fall.
D) The equilibrium real GDP will fall short of potential GDP.

Question

Quizplus · Accepted Answer

When the government increases spending more than necessary to close a recessionary gap, it can lead to an increase in demand without a corresponding increase in supply, which leads to an increase in prices. This leads to demand-pull inflation.

Suppose That the Government Increases Spending More Than Is Necessary