Question

Suppose that Congress and the president decide that economic performance is weakening and that the government should? "do something" about the situation. They make no tax changes but do enact new laws increasing government spending on a variety of programs.

Prior to the congressional and presidential? actions, careful studies by government economists indicated that the direct multiplier effect of a rise in government expenditures on equilibrium real GDP is equal to 6. In the 12 months since the increase in government? spending, however, it has become clear that the actual ultimate effect on real GDP will be less than half of that amount.

This could have happened because of all the following except

A. a supply-side effect.
B. a short-run increase in the price level.
C. an indirect crowding out.
D. direct expenditure offset.

Answer 1

The correct answer is A) a supply-side effect.

This could have happened because of all the following except a supply-side effect.

On the contrary, what these measures produce is a short-run increase in the price level, an indirect crowding out, and a direct expenditure offset.

That is why the federal government has to act promptly but cautious in considering all the consequences and by-products of the decisions it is about to make. For instance, we have the actual scenario of C*vid-19 and the disastrous economic consequences in the US economy if the federal government fails in enacting the proper legislation or in creating the financial aid to support the workers and the American families.