Suppose there has been an increase in government spending.As a result, real GDP will ________ in the short run, and ________ in the long run.
A)increase; increase further
B)increase; decrease to its initial value
C)decrease; decrease further
D)decrease; increase to its initial level
E)decrease; remain at this lower level

Question

Quizplus · Accepted Answer

An increase in government spending typically boosts aggregate demand, leading to an increase in real GDP in the short run. However, in the long run, the economy tends to return to its potential output level, implying that the real GDP would decrease back to its initial value as the economy adjusts.

Suppose There Has Been an Increase in Government Spending