Question

Briefly explain with a graph whether given statement is true or false. “An increase in government spending will result in an increase in the price level and an increase in real GDP in the long run.”

Answer 1

False

When we talked about short-term then and when there is increase in the government expenditure then it will lead to have more consumption, investment in the economy and overall increase in the aggregate demand

This will cause the shift of aggregate demand curve to the right

But when we talk about long run then the continuous of having government expenditure will lead to have more inflation in the economy and there is inflationary gap which will be fulfilled by leftward shift of the aggregate supply curve and this will cause the reach the economy to again at full employment level shown below

LRAS SRAS Al $) Å 9 SAS Inflationary gap 6 T T ADI LADI RGPP Full employment level