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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