Suppose real GDP is currently $12.5 trillion and potential real GDP is $13 trillion. If the president and Congress increased government purchases by $500 billion, what would be the result on the economy?
What will be an ideal response?
The economy would go from a short-run equilibrium below potential GDP to a short-run equilibrium above potential GDP. The increase in government purchases, which equals the shortfall in real GDP from potential real GDP, is too large. The increase in government purchases needs to be less than the shortfall in real GDP because of the multiplier effect.
You might also like to view...
An increase in the wage rate will lead to a reduction in the quantity of labor supplied if
a. the substitution effect outweighs the income effect b. the income effect outweighs the substitution effect c. the opportunity costs of leisure do not increase d. the opportunity costs of working always increase e. workers are irrational because otherwise they would be violating the law of supply
A consumer's demand for a product decreases because other consumers own it. This would reflect: a. A bandwagon effect
b. a positive network externality. c. A snob effect. d. none of the above