In the long run, a higher government deficit does NOT affect equilibrium real Gross Domestic Product (GDP), so that continuous increases in the government deficit will
A) lead to greater tax revenues.
B) reduce the price level.
C) reduce spending on privately provided goods and services.
D) increase the unemployment rate.

Question

Quizplus · Accepted Answer

In the long run, government deficits do not affect equilibrium real GDP since they only lead to higher interest rates, which cause a reduction in spending on privately provided goods and services by households and firms. Consequently, the continuous increases in the government deficit will result in a decrease in private sector spending and, therefore, reduce spending on privately provided goods and services.

In the Long Run, a Higher Government Deficit Does NOT