The key idea of the real business theory is that potential output itself will remain stable over time

The impact of an increase in government purchases may be smaller than first assumed (in the crowding out effect) because: a. As the new spending takes place, income and real GDP will rise which will cause households and firms to increase their demand for money to accommodate increased buying and selling. b. The increase in the demand for money will cause the interest rate to rise

c. As a result of the higher interest rate, consumers may decide against buying a car, a home, or other interest sensitive goods, and businesses may cancel or scale back plans to expand or buy new capital equipment. d. All of the above

The most narrow measure of money is:

a. M1 b. M2 c. M3 d. Cash