Suppose real GDP is $14 trillion and potential real GDP is $14.4 trillion.An increase in government purchases of $400 billion would cause real GDP to ________ potential real GDP (assuming a constant price level).
A)equal
B)be less than
C)be more than
D)There is insufficient information given here to draw a conclusion.

Question

Quizplus · Accepted Answer

An increase in government purchases will increase aggregate demand and shift the aggregate demand curve to the right, which will lead to an increase in real GDP. If the increase in government purchases is $400 billion, real GDP would exceed potential real GDP by $400 billion, which is the difference between the two values. Therefore, real GDP would be more than potential real GDP.

Suppose Real GDP Is $14 Trillion and Potential Real GDP