Suppose that real GDP equals potential GDP, but the government believes that the economy is in a below full-employment equilibrium. As a result, the government increases its expenditure on goods and services. In response to the governmentʹs fiscal policy,
A) potential GDP decreases.
B) aggregate demand will increase.
C) an equilibrium with real GDP less than potential GDP will occur.
D) None of the above answers is correct..

Question

Quizplus · Accepted Answer

The increase in government expenditure will cause an increase in aggregate demand, leading to an increase in real GDP. Since initial conditions assume that real GDP equals potential GDP, this increase in real GDP will still be below potential GDP, leading to an equilibrium with real GDP less than potential GDP. Therefore, options A and C are incorrect, and option B is the best choice. Option D is also incorrect as there is a correct answer.

Suppose That Real GDP Equals Potential GDP, but the Government