In the Smets-Wouters DSGE model, an increase in government spending will cause:
i. Real GDP to rise
ii. Consumption to fall
iii. Inflation to rise
A) i and ii
B) i, ii, and iii
C) iii
D) i
E) ii

Question

Quizplus · Accepted Answer

In the Smets-Wouters DSGE model, an increase in government spending typically leads to an increase in real GDP due to higher demand, a decrease in consumption as resources are reallocated away from private consumption towards government spending, and an increase in inflation due to the higher demand in the economy.

In the Smets-Wouters DSGE Model, an Increase in Government Spending