Suppose the economy is already at its potential output.What is the spending multiplier?
A) zero in the long run
B) infinite in the long run
C) 1 in the long run
D) zero in the short run

Question

Suppose the economy is already at its potential output.What is the spending multiplier?  
A) zero in the long run 
B) infinite in the long run 
C) 1 in the long run 
D) zero in the short run

Quizplus · Accepted Answer

In the long run, when the economy is at its potential output, any increase in spending will not affect the output level, as the economy is already operating at full capacity. Therefore, the spending multiplier is zero in the long run.

Suppose the Economy Is Already at Its Potential Output