Suppose real GDP is $13 trillion, potential GDP is $13.5 trillion, and the government plans to use fiscal policy to restore the economy to potential GDP. Assuming a constant price level, the government would need to increase government purchases by:
A)$500 billion.
B)less than $500 billion.
C)more than $500 billion.
D)None of these options is correct. The government must act to decrease government purchases in this case.

Question

Quizplus · Accepted Answer

The government would need to increase government purchases by less than $500 billion due to the multiplier effect, where an initial increase in spending leads to further increases in income and consumption, amplifying the initial impact on the economy.

Suppose Real GDP Is $13 Trillion, Potential GDP Is $13