QuestionJune 28, 2025

An increase in government expenditure can __ potential GDP and an increase in taxes can __ potential GDP. A. increase; increase B. decrease; decrease C. increase; never change D. increase; decrease E. never change; never change

An increase in government expenditure can __ potential GDP and an increase in taxes can __ potential GDP. A. increase; increase B. decrease; decrease C. increase; never change D. increase; decrease E. never change; never change
An increase in government expenditure can __ potential GDP and an increase in taxes can __ potential GDP.
A. increase; increase
B. decrease; decrease
C. increase; never change
D. increase; decrease
E. never change; never change

Solution
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Answer

C. increase; never change Explanation 1. Analyze the effect of government expenditure on potential GDP An increase in government expenditure can lead to higher aggregate demand, potentially increasing potential GDP if it results in more productive capacity. 2. Analyze the effect of taxes on potential GDP An increase in taxes typically reduces disposable income and consumption, which may not directly affect potential GDP unless it impacts investment or productivity.

Explanation

1. Analyze the effect of government expenditure on potential GDP<br /> An increase in government expenditure can lead to higher aggregate demand, potentially increasing potential GDP if it results in more productive capacity.<br />2. Analyze the effect of taxes on potential GDP<br /> An increase in taxes typically reduces disposable income and consumption, which may not directly affect potential GDP unless it impacts investment or productivity.
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