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 more 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 increases by less in the short run than in the long run.
D) real GDP does not change in the short run because the price level increases.

Question

Quizplus · Accepted Answer

In the short run, an increase in government expenditure typically leads to an increase in aggregate demand, which, given the upward-sloping short-run aggregate supply curve, results in higher output (real GDP) and higher prices. This effect is more pronounced in the short run because, in the long run, prices and wages adjust, potentially leading to a lesser impact on real GDP as the economy moves back to its potential output.

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