If the economy is already at its potential output, then the spending multiplier is _____
A) equal to zero in the long run.
B) infinite in the long run.
C) equal to 1 in the long run.
D) equal to zero in the short run.
E) equal to 1 in the short run.

Question

Quizplus · Accepted Answer

When the economy is at its potential output, any additional spending will not increase the output in the long run due to constraints like full employment and resource utilization, leading to inflation rather than real output growth. Thus, the spending multiplier is considered to be zero in the long run as additional spending does not lead to an increase in output.

If the Economy Is Already at Its Potential Output, Then