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Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383

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BuyFindarrow_forward

Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383
Textbook Problem

Suppose the government undertakes an expansionary fiscal policy measure that raises aggregate demand but individuals incorrectly anticipate the measure, bias upward. What will the short- and long-run changes be in the price level and Real GDP?

To determine

The short-run and long-run effects of expansionary fiscal policy.

Explanation

An expansionary fiscal policy adopted by the government makes a rightward shift in the aggregate demand curve through the increase in public expenditure. If the economy is in long-run equilibrium at the initial level, then the rightward shift in aggregate demand curve is less than the leftward shift in the short-run aggregate supply curve...

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