Suppose the economy is initially operating at full employment. A fiscal policy action that results in an increase in the size of the budget deficit will cause which of the following in the long run?
A) an increase in real GDP.
B) have no effect on both the level and composition of real GDP.
C) a reduction in the price level.
D) change the composition of real GDP.

Question

Quizplus · Accepted Answer

In the long run, an increase in the budget deficit can lead to higher interest rates, which may crowd out private investment. This changes the composition of real GDP by reducing investment and potentially increasing government spending.

Suppose the Economy Is Initially Operating at Full Employment