Suppose that real GDP equals potential GDP, but the government believes that the economy is in a below full-employment equilibrium. As a result, the government increases its expenditure on goods and services. In response to the government's fiscal policy
A) aggregate demand will increase.
B) an equilibrium with real GDP less than potential GDP will occur.
C) potential GDP decreases.
D) None of the above answers is correct.

Question

Quizplus · Accepted Answer

When the government increases its expenditure on goods and services, it directly increases aggregate demand. This is because government spending is a component of aggregate demand, and an increase in government spending will shift the aggregate demand curve to the right, leading to an increase in the overall demand for goods and services in the economy.

Suppose That Real GDP Equals Potential GDP, but the Government