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.

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Definitions:

Absolute Advantage

a condition in which a country, individual, or firm can produce more of a good or service with the same amount of resources than others can.

Resources

Inputs used in the production of goods and services, including labor, capital, and natural resources.

Exchange Rate

How much one currency is worth in terms of another during exchange.

Euros

The official currency of 19 of the 27 European Union countries, known as the Eurozone.