If the government increases spending and there is a complete direct expenditure offset, then
A) aggregate demand and real Gross Domestic Product (GDP) will not change.
B) aggregate demand and real Gross Domestic Product (GDP) will increase by the amount of the spending increase.
C) the price level will drop.
D) the government spending multiplier will be greater than zero.

Question

Quizplus · Accepted Answer

If there is a complete direct expenditure offset, it means that private spending decreases by the same amount as government spending increases. Therefore, there is no net change in total spending in the economy, and aggregate demand (which represents total spending) will not change. Real GDP, which represents the total output of the economy, is directly affected by changes in aggregate demand, so it will also not change in this scenario. The price level is not affected by changes in government spending or private spending, so it will not drop. Finally, the government spending multiplier (which represents the amount by which GDP changes in response to a change in government spending) will be zero in this scenario, since there is no net change in GDP.

If the Government Increases Spending and There Is a Complete