When the price level increases, the effect of an increase in government spending on real GDP is

Question

Quizplus · Accepted Answer

When the price level increases, there is likely to be inflationary pressure in the economy, which results in a decrease in the purchasing power of consumers, in turn leading to a decrease in consumption and investment spending. As a result, the multiplier effect is reduced, and the actual increase in real GDP is smaller than expected. Therefore, the effect of an increase in government spending on real GDP is overstated.

When the Price Level Increases, the Effect of an Increase