In the long run, a higher government budget deficit causes
A) a decrease in both private spending and equilibrium real GDP.
B) an increase in both private spending and equilibrium real GDP.
C) a decrease in private spending while equilibrium real GDP remains unchanged.
D) no change in private spending but a decrease in equilibrium real GDP.

Question

Quizplus · Accepted Answer

In the long run, a higher government budget deficit can lead to "crowding out," where increased government borrowing raises interest rates, reducing private investment spending. However, equilibrium real GDP remains unchanged in the long run due to the economy's return to its potential output level.

In the Long Run, a Higher Government Budget Deficit Causes