If there is a dollar-for-dollar direct expenditure offset, then
A) increases in aggregate demand will also increase long-run aggregate supply.
B) increases in government spending will not increase aggregate demand.
C) increases in aggregate demand will increase the price level, but leave real output unchanged.
D) increases in aggregate demand will increase real output, but leave the price level unchanged.

Question

Quizplus · Accepted Answer

Increases in government spending are typically aimed at increasing aggregate demand. However, if there is a dollar-for-dollar direct expenditure offset, it means that for every dollar the government spends, there is an equivalent reduction in spending elsewhere in the economy. This could be through higher taxes, reduced private spending, or some other mechanism that directly removes the same amount of spending power from the economy as the government adds. Therefore, the net effect on aggregate demand would be neutral, meaning increases in government spending would not increase aggregate demand under these conditions.

If There Is a Dollar-For-Dollar Direct Expenditure Offset, Then