When the Economy Is Producing Its Potential Output, an Increase

question 68

Multiple Choice

When the economy is producing its potential output, an increase in government spending must necessarily reduce some component of private spending. This phenomenon is called

• A) fiscal policy.
• B) crowding out.
• C) the multiplier effect.
• D) entitlement spending.

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Definitions:

Government Expenditures

Financial spending by the government which includes spending on goods and services, social welfare, public infrastructure, and defense.

Short Run

A period in economic theory during which at least one input (like capital) is fixed, contrasting with the long run where all factors of production are variable.

Prices

The amount of money expected, required, or given in payment for something.

Unemployment

Unemployment refers to the situation when individuals who are able and willing to work cannot find employment.