Suppose the Economy Is in Macroeconomic Equilibrium with Real GDP

Multiple Choice

Suppose the economy is in macroeconomic equilibrium with real GDP equal to Y*. If the government then implements an expansionary fiscal policy by increasing government purchases, what are the long- run effects on potential output?

A) The growth rate of potential output may be reduced due to the crowding out of investment.
B) Potential output will adjust to the new higher level achieved with the expansionary fiscal policy.
C) The level of potential output is fixed and will not be affected by fiscal policy.
D) The growth rate of potential output will rise due to the higher level of aggregate demand.
E) Potential output will drop below its starting point because of the crowding out of investment.