Starting from a long-run equilibrium, an increase in government expenditures increases output in the short run but not in the long run.

Question

Quizplus · Accepted Answer

In the short run, an increase in government expenditures can stimulate demand, leading to higher output. However, in the long run, the economy adjusts back to its potential output, and the effect of increased government spending on output diminishes, assuming classical economic theory where the economy is self-correcting.

Starting from a Long-Run Equilibrium, an Increase in Government Expenditures