ECONOMICS (CBSE/UGC NET)

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ECONOMICS

FISCAL POLICY

Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
Assume that the economy is at long run equilibrium and that the government increases spending. In the short run, AD will increase. In the long run, what will happen assuming no additional government involvement?
A
AD will decrease
B
AS will decrease
C
AD will increase
D
AS will increase
E
Movement along the AS curve
Explanation: 

Detailed explanation-1: -CROWDING OUT PRIVATE SPENDING AND EMPIRICAL EVIDENCE Taxes finance government spending; therefore, an increase in government spending increases the tax burden on citizens-either now or in the future-which leads to a reduction in private spending and investment. This effect is known as “crowding out."

Detailed explanation-2: -Answer and Explanation: If an economy is in its long-run equilibrium, the prices will go up if aggregate demand increases.

Detailed explanation-3: -If an economy is said to be in long-run equilibrium, then Real GDP is at its potential output, the actual unemployment rate will equal the natural rate of unemployment (about 6%), and the actual price level will equal the anticipated price level.

Detailed explanation-4: -Short-run equilibrium is when the aggregate amount of output is the same as the aggregate amount of demand. Long-run equilibrium is when prices adjust to changes in the market and the economy functions at its full potential.

There is 1 question to complete.
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