Beginning from full-employment macro equilibrium, increase in government spending will cause real GDP to:
A) increase in the short run.
B) decline in the long run.
C) decline in the short run.
D) increase in the long run.

Question

​ Beginning from full-employment macro equilibrium, increase in government spending will cause real GDP to:
A) ​increase in the short run.
B) ​decline in the long run.
C) ​decline in the short run.
D) ​ increase in the long run.

Quizplus · Accepted Answer

When there is full-employment macro equilibrium, the economy is operating at its potential output. An increase in government spending will cause an increase in aggregate demand, which will lead to an increase in real GDP in the short run. However, in the long run, the economy may reach a new equilibrium where prices have adjusted to the increased demand, and the increase in government spending may not have a significant effect on real GDP. Therefore, option A is the best choice.

​ Beginning from Full-Employment Macro Equilibrium, Increase in Government Spending

Beginning from Full-Employment Macro Equilibrium, Increase in Government Spending