An increase in government expenditure can ________ potential GDP and an increase in taxes can ________ potential GDP.
A)increase;increase
B)increase;never change
C)decrease;decrease
D)never change;never change
E)increase;decrease

Question

Quizplus · Accepted Answer

An increase in government expenditure can lead to an increase in demand for goods and services, which would lead to an increase in production and ultimately an increase in potential GDP. On the other hand, an increase in taxes would lead to a decrease in disposable income and consumption, which can lower production and decrease potential GDP. Therefore, an increase in government expenditure can increase potential GDP while an increase in taxes can decrease potential GDP.

An Increase in Government Expenditure Can ________ Potential GDP and an Increase