Consider a hypothetical country in which, initially, real GDP equals potential GDP. Suppose that the government purchases increase. All else equal (with regard to the AD-IA model), relative to the short-run level, in the medium run, output is

Consider a hypothetical country in which, initially, real GDP equals potential GDP. Suppose that the government purchases increase. All else equal (with regard to the AD-IA model), relative to the short-run level, in the medium run, output is:

A. higher.

B. lower.

C. the same.

Solutions

Expert Solution

C) Same

With regard to the AD-IA model relative to the short-run level, in the medium run, output is same

In the long run, real GDP equals potential GDP, and real GDP also equals aggregate expenditure. This means that, in the long run, the price level must be at the point where aggregate demand and aggregate supply meet. ... As prices are greater than the long-run equilibrium level of prices, output is below potential output.

If aggregate demand increases to AD2, in the short run, both real GDP and the price level rise. If aggregate demand decreases to AD3, in the short run, both real GDP and the price level fall. ... This occurs at the intersection of AD 1 with the long-run aggregate supply curve at point B.

Same

Junaid answered 1 year ago

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Question

Consider a hypothetical country in which, initially, real GDP equals potential GDP. Suppose that the government purchases increase. All else equal (with regard to the AD-IA model), relative to the short-run level, in the medium run, output is

Solutions

Expert Solution

Related Solutions

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