When the price level increases, the effect of a change in government spending on real GDP will be understated.

Question

Quizplus · Accepted Answer

When the price level increases, the real GDP decreases, which means that a change in government spending may not have as significant of an impact on real GDP as it would have in a lower price level environment. Therefore, the effect of a change in government spending on real GDP will be understated.

When the Price Level Increases, the Effect of a Change