Suppose an economy is at potential GDP and an expansionary policy is correctly anticipated.Which of the following will result?
A) little or no increase in GDP
B) an increase in wages along with a dramatically falling price level
C) a rapidly expanding GDP
D) a severe decline in GDP

Question

Suppose an economy is at potential GDP and an expansionary policy is correctly anticipated.Which of the following will result?  
A) little or no increase in GDP 
B) an increase in wages along with a dramatically falling price level 
C) a rapidly expanding GDP 
D) a severe decline in GDP

Quizplus · Accepted Answer

When an economy is at potential GDP, it means that it is already operating at its maximum capacity without experiencing inflationary pressures. Therefore, if an expansionary policy is correctly anticipated, it will not lead to a rapid expansion of GDP since the economy is already at its full potential. Instead, it may lead to little or no increase in GDP as the economy is already operating at its full potential without any spare capacity to increase output.

Suppose an Economy Is at Potential GDP and an Expansionary