Suppose that the share of gove rnment spending is incre a s e d. If potential GDP is unch a n ge d, wh i ch of the fo l l owing necessari ly happens in the long ru n ?

Question

Quizplus · Accepted Answer

When government spending increases without a change in potential GDP, the shares of consumption expenditures, investment, and net exports must all decrease to accommodate the increased share of government spending in the economy's total output. This is because the total output (or GDP) is divided among consumption, investment, government spending, and net exports. An increase in the share of one component, in this case, government spending, necessarily reduces the share available for the other components if the total GDP remains unchanged.

Suppose That the Share of Gove Rnment Spending Is Incre