Government expenditures fund construction of a high-rise office building on a pl

Question

Government expenditures fund construction of a high-rise office building on a plot of land where a private company otherwise would have constructed an essentially identical building. The U.S. government is in the midst of spending more than $1 billion on seven buildings containing more than 100,000 square feet of space to be used for study of infectious diseases. Prior to the government's decision to construct these buildings, a few universities had been planning to build essentially the same facilities using privately obtained funds. After construction on the government buildings began, however, the universities dropped their plans. Evaluate whether the governments Si billion expenditure is actually likely to push U.S. real GDP above the level it would have reached in the absence of the government's construction spree. Determine whether each of the following is an example of a discretionary fiscal policy action. A recession occurs, and government-funded unemployment compensation is paid to laid-off

Explanation / Answer

GDP = Consumption (C) + Private investment (I) + Government spending (G) + Net export (X – M)

Real GDP = Nominal GDP – Inflation

As per the above equation, GDP could be increased either through I or G for the same amount. But if it is the question of real GDP, private investment would be desired most. Real GDP would increase through private investments only, since the universities are professional they can complete the matter at lower cost. There would not be any unnecessary funding causing inflation, which may lead through government spending. Therefore, G can’t push the real GDP above the absence of G.

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