If the economy is already producing at its potential,_____.
A)the spending multiplier equals 1/(1 - MPC)in the long run
B)the spending multiplier is less than 1/(1 - MPC)in the long run
C)the spending multiplier is more than 1/(1 - MPC)in the long run
D)the spending multiplier equals zero in the long run
E)the aggregate demand curve is horizontal

Question

Quizplus · Accepted Answer

If the economy is already producing at its potential, there is no room for further output expansion. Therefore, any injections in the economy (such as government spending or investment) will only lead to an equal amount of leakages (such as taxes or imports). This means that the spending multiplier, which measures the effect of injections on the overall output, will be zero in the long run.

If the Economy Is Already Producing at Its Potential,_____