Suppose the Economy Is in Macroeconomic Equilibrium with Real GDP

question 110

Multiple Choice

Suppose the economy is in macroeconomic equilibrium with real GDP equal to Y*.If the government then implements an expansionary fiscal policy by increasing government purchases,what are the long-run effects on potential output?

• A)The growth rate of potential output may be reduced due to the crowding out of private investment.
• B)Potential output will adjust to the new higher level achieved with the expansionary fiscal policy.
• C)Potential output will drop below its starting point because of the crowding out of investment.
• D)The growth rate of potential output will rise due to the higher level of aggregate demand.
• E)The level of potential output is fixed and will not be affected by fiscal policy.

---

Definitions:

Stock Prices

The current market price at which a share of stock can be bought or sold.

Economic Value

Refers to the maximum amount a consumer is willing to pay for an item in contrast to its market price or the value of the benefits derived from owning the item.

Publicly Available Information

Information that is not restricted to private access and can be legally obtained by any member of the general public. This includes data published by governments, companies, and other entities.

Strong Form

In market efficiency theory, the strong form suggests that all information, both public and private, is reflected in stock prices.