The economy is in a recessionary gap. There is no crowding out and government has correctly estimated that to bring the economy into long-run equilibrium it should raise government purchases by $123 billion. If government purchases are raised by $123 billion, does it follow that the economy will be moved into long-run equilibrium?
A) Yes, because all the necessary conditions for effective fiscal policy are present.
B) No, because the economy may be self-regulating, and by the time expansionary fiscal policy is effective, the AD curve may intersect the SRAS curve at an inflationary-gap level of Real GDP.
C) Yes, because of the validity of the balanced budget theorem.
D) No, because of inflexible wages and the fact that the SRAS curve is upward-sloping.
E) none of the above
B
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