8. If the aggregate supply curve slopes up before reaching potential real GDP, (

Question

8. If the aggregate supply curve slopes up before reaching potential real GDP, (Points : 7) the effect of government spending on real GDP is enhanced the government must increase its spending by more than the recessionary gap to reach potential GDP prices will remain constant as government spending increases prices will decrease as government spending increases Question 9. 9. An increase in government spending that reduces private spending is called: (Points : 7) crowding out Ricardian equivalence discretionary fiscal policy governmental debt

Explanation / Answer

(8) Effect of government spending on real GDP is enhanced

This is due to the multiplier effect. If spending multiplier is M, a $1 increase in government spending will increase real GDP by $m, where M > 0.

(9) Crowding out

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