Suppose real GDP is $1.7 trillion and potential real GDP is $1.74 trillion.An increase in government purchases of $40 billion would cause real GDP to ________ potential real GDP (assuming a constant price level).

Question

Quizplus · Accepted Answer

An increase in government purchases, as one of the components of aggregate demand, will cause an increase in real GDP. Since potential real GDP is the maximum level of output the economy can produce, an increase in real GDP due to an increase in government purchases will exceed the potential real GDP level, resulting in choice C.

Suppose Real GDP Is $1