Using the AD-AS model, an increase in government expenditure
A) has no impact on real GDP.
B) has no impact on real GDP, but will increase potential GDP.
C) increases both real GDP and the price level.
D) has a full multiplier effect on real GDP, leaving the price level unchanged in the long run.

Question

Quizplus · Accepted Answer

An increase in government expenditure, according to the Aggregate Demand-Aggregate Supply (AD-AS) model, shifts the aggregate demand curve to the right. This results in an increase in both the real GDP and the price level in the short run, as the economy moves to a new equilibrium point with a higher output and price level.

Using the AD-AS Model, an Increase in Government Expenditure