What is the difference between the short run and the long run when there is full employment and the government engages in deficit spending?
A) Real GDP will increase in both the short run and the long run.
B) Real GDP will increase in the long run but not the short run.
C) Real GDP will increase in the short run but not the long run.
D) Real GDP will not increase in either the long run or the short run.

Question

Quizplus · Accepted Answer

In the short run, deficit spending can stimulate aggregate demand and increase real GDP. However, in the long run, prices and wages will adjust, and the economy will return to its natural level of output, known as potential GDP. Therefore, there is no sustained increase in real GDP in the long run. Full employment does not affect this outcome as potential GDP is independent of the level of employment.

What Is the Difference Between the Short Run and the Long