If the economy is producing a level of output that is consistent with the potential output level, and government purchases increase, describe what happens in terms of the long-run real interest rate, and why, to keep the economy at its potential output level.
What will be an ideal response?
If the economy is producing its potential output and government purchases increase the short-run result may be an expansionary gap. In the long run the real interest rate will rise. This is so that one of the interest sensitive components of aggregate demand (investment, consumption, and/or net exports) decreases to keep the level of output at potential and corrects for the expansionary gap.
You might also like to view...
If an overvalued currency is allowed to float:
A) its quantity demanded in exchange for the other currency will decrease. B) its quantity supplied in exchange for the other currency will increase. C) its value will depreciate. D) its value will appreciate.
Pick the decision maker from the list below
A) The head of Al Qaeda B) The Taliban C) The Government of Afghanistan D) The Middle East E) All of the above are decision makers.
Where do economic agents such as individuals, firms, and nations interact with each other?
A) in any arena that brings together buyers and sellers B) in any location where transactions can be monitored by consumer groups and taxed by the government C) in any physical location where people can physically get together for selling goods, such as shopping malls D) in public locations monitored by the government
Credit unions made it through the 1980s in relatively good shape because
A) most of their depositors were individuals. B) most of their depositors were businesses. C) they held many mortgages among their assets. D) they held no mortgages among their assets.