Question

The U.S. federal government can spend money in a variety of ways. For example, the government could build a major new naval training facility in the landlocked state of West Virginia, or improve the nation’s transportation and communication systems. Suppose RGDP is below the full-employment level. If the government spends the same amount of money on either project, how will the results differ if the government chooses to improve the country’s transportation and communication systems rather than build a naval base in West Virginia?A. The increase in RGDP will be greater, and the increase in the price level will be smaller.B. The increase in RGDP will be greater, but so will the increase in the price level.C. The increase in RGDP will be smaller, but the increase in the price level will be larger.D. The increase in RGDP will be smaller and so will the increase in the price level.E. The effects of the two projects will be identical as long as the amount spent is the same.

Answer 1

Answer: The answer is A

Explanation:

The real GDP is used to measure the price of all the goods and services produced in a country in a given period of time. When the economy is below full employment level, it indicate the presence of deflationary gap or recessionary gap in the economy. When the economy is below the full employment the real GDP will be greater but the increase in price level will be smaller the reason been that the increase has no effect on the price level of goods and services.

The deflation means a decrease in the quantity of money in circulation or a fall in prices of goods and services. The increase in the spending on the economy by the government such as the spending on the building of a Navy base or on the spending on transportation and communication would only succeeded in increasing the Real GDP but will have no effect on the price level. When there is a deflationary gap or recessionarygap in the economy, the government of a country may introduce a deflationary policy in order to influence the economy. This is done by credit squeeze, a reduction in government expenditure or a reduction in the total supply of money in the economy

Answer 2

Answer:

Option A is correct

Explanation:

Since transportation system and communication system adds a reasonable percentage to gdp, there would be high increase in gdp which would mediate unemployment with small increase in price of demand because of increased supply.