Taking into account the upward -sloping short-run aggregate supply curve, the short-run effect of an increase in government expenditure on real GDP is that
A) real GDP increases by less in the short run than in the long run.
B) real GDP increases by the same amount in the short run as in the long run.
C) real GDP does not change in the short run because the price level increases.
D) real GDP increases by more in the short run than in the long run.

Question

Quizplus · Accepted Answer

In the short run, an increase in government expenditure shifts the aggregate demand curve to the right, causing the equilibrium level of real GDP to increase. However, as the economy moves along the upward-sloping short-run aggregate supply curve, firms may experience temporary cost increases, such as higher wages or materials costs, which can limit the extent to which real GDP can increase in the short run. Therefore, real GDP increases by more in the short run than in the long run.

Taking into Account the Upward -Sloping Short-Run Aggregate Supply Curve