If an Economy Is Operating at Its Potential Output Level

question 158

True/False

If an economy is operating at its potential output level, a change in aggregate demand or short-run aggregate supply will induce an inflationary or a recessionary gap.

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Definitions:

Crowding-Out Effect

The phenomenon where increased government spending leads to a reduction in private sector spending, often due to higher interest rates.

Government Spending

Refers to the total expenditure incurred by the government on various goods, services, and projects to fulfill its economic and social objectives.

National Income

The total income earned by a country's people and businesses, including wages, profits, and rent, over a specific period.

Crowding-Out Effect

The phenomenon where increased government spending leads to a reduction in private sector spending and investment, due to higher interest rates or other factors.