Suppose real GDP is $13 trillion and potential real GDP is $13.5 trillion.If Congress and the president increase government purchases by $500 billion,then the economy will be brought to equilibrium at potential real GDP.

Question

Quizplus · Accepted Answer

Increasing government purchases by $500 billion will lead to an increase in aggregate demand and output in the short run. However, if the economy was already at full employment and potential real GDP before the increase in government purchases, then the increase in aggregate demand will only lead to inflationary pressure and not an increase in output. Therefore, the economy will not be brought to equilibrium at potential real GDP.

Suppose Real GDP Is $13 Trillion and Potential Real GDP