When the price level increases, the effect of a change in government spending on real GDP is understated.

Question

Quizplus · Accepted Answer

When the price level increases, the effect of a change in government spending on real GDP is overstated, not understated. This is because an increase in the price level reduces the purchasing power of consumers and producers, leading to a decrease in real GDP. Therefore, any increase in government spending will have a smaller impact on real GDP than it would have had if the price level had not increased.

When the Price Level Increases, the Effect of a Change