Suppose the Economy Is in Macroeconomic Equilibrium with Real GDP

question 68

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

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Definitions:

Trinomial

A polynomial with three terms, typically written as ax^2 + bx + c.

Perfect Square Trinomial

A trinomial expression that is the square of a binomial, taking the form \(a^2 + 2ab + b^2\).

Polynomial

A mathematical expression involving a sum of powers in one or more variables multiplied by coefficients.

Perfect Square Trinomial

A trinomial that can be factored into two identical binomials, resulting from squaring a binomial.