Suppose real GDP is currently $12.5 trillion and potential real GDP is $13 trillion. If the president and Congress increased government purchases by $500 billion, what would be the result on the economy?
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What will be an ideal response?
The economy would go from a short-run equilibrium below potential GDP to a short-run equilibrium above potential GDP. The increase in government purchases, which equals the shortfall in real GDP from potential real GDP, is too large. The increase in government purchases needs to be less than the shortfall in real GDP because of the multiplier effect.
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a. create production facilities b. check the infrastructure that impedes development c. combat infant mortality rates d. develop human capital e. create simultaneously a vast network of markets whose demands and supplies are created by the investments
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a. stockholders b. managers c. sole proprietors d. partners e. at risk of bankruptcy if the firm makes losses
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Answer the following statement true (T) or false (F)