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 does not change in the short run because the price level increases.
B)real GDP increases by less in the short run than in the long run.
C)real GDP increases by the same amount in the short run as in the long run.
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, leading to a higher real GDP due to the upward-sloping short-run aggregate supply curve. In the long run, the economy may adjust back to potential GDP, so the short-run increase is typically larger.

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