An increase in spending in the economy will lead to an increase in production if:
A)government expenditure also increases.
B)the economy is above potential GDP.
C)there are no supply side constraints.
D)the economy has large stocks of inventory.

Question

Quizplus · Accepted Answer

If there are no supply side constraints, then an increase in spending would not be limited by the availability of resources and therefore production could increase in response to the increased demand. Government expenditure and the economy's position relative to potential GDP may have some impact on production, but they are not as relevant as the presence of supply side constraints. Large stocks of inventory may indicate that production has already increased in anticipation of demand, but it does not necessarily imply that further increases in spending will lead to additional production.

An Increase in Spending in the Economy Will Lead to an Increase