Suppose that Congress and the president decide that economic performance is weak

Question

Suppose that Congress and the president decide that economic performance is weakening and that the government should? "do something" about the situation. They make no tax changes but do enact new laws increasing government spending on a variety of programs.

Prior to the congressional and presidential? actions, careful studies by government economists indicated that the direct multiplier effect of a rise in government expenditures on equilibrium real GDP is equal to 6. In the 12 months since the increase in government? spending, however, it has become clear that the actual ultimate effect on real GDP will be less than half of that amount.

This could have happened because of all the following except

A. a? supply-side effect.

B. a? short-run increase in the price level.

C. an indirect crowding out.

D. direct expenditure offset.

Explanation / Answer

Option d is correct

A short run increase in the price level when reduce the level of GDP through multiplier effect. Similarly private investment can be reduced due to crowding out which reduces the increase in aggregate demand. There can be a decrease in aggregate supply which also reduces the real GDP. However there is no possibility that direct expenditure can reduce the aggregate demand.

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