In the long run, what effect does a government's deficit spending have on equilibrium real Gross Domestic Product (GDP)?
A) Government deficit spending will increase equilibrium real Gross Domestic Product (GDP).
B) Deficit spending will decrease the nation's equilibrium real Gross Domestic Product (GDP).
C) Higher government deficits will not raise equilibrium Gross Domestic Product (GDP) above the full-employment level.
D) Higher government deficits will raise equilibrium Gross Domestic Product (GDP) above the full-employment level and also have an inflationary effect.

Question

Quizplus · Accepted Answer

In the long run, higher government deficits may lead to crowding out of private investment, which could limit the potential increase in equilibrium real GDP. Additionally, if the economy is already at full employment, any increase in aggregate demand due to government spending will result in higher prices rather than an increase in output. Therefore, higher government deficits will not raise equilibrium real GDP above the full-employment level.

In the Long Run, What Effect Does a Government's Deficit