When the economy operates below full employment, an increase in government spending must crowd out another component of GDP.

Question

Quizplus · Accepted Answer

When the economy is operating below full employment, there are resources that are not being fully utilized. An increase in government spending can stimulate the economy and increase aggregate demand, leading to an increase in GDP without crowding out another component of GDP. This is because the economy has the potential to produce more output without putting upward pressure on prices or interest rates.

When the Economy Operates Below Full Employment, an Increase in Government