Question

​In 2017, in proposing a $1 trillion increase in government spending on infrastructure, President Trump argued that the spending would increase total employment in the United States
Source: Ted Mann and Michael C.​ Bender, "President Trump to Launch Push for Infrastructure​ Investment," Wall Street Journal​, June​ 4, 2017.

In the short​ run, increases in federal spending will increase real GDP and employment if:
A. the economy is producing at less than its potential output and has some cyclical unemployment.
B. wages and prices do not change.
C. the economy is experiencing inflation.
D. the price level remains stable.

Answer 1

Answer:

A. the economy is producing at less than its potential output and has some cyclical unemployment.

Explanation:

Increase in government spending will increase domestic income, only if economy is producing at less than its potential output.

Increase in federal government spending raises the level of 'govt expenditure' in Aggregate Demand. This creates 'Excess Demand' (AD > AS). However, if the economy is at full employment level, i.e all the resources are already best efficiently utilised as per their production potential. Then, the economy can't increase its domestic income more than its full employment (full potential) level. So : Increase in government spending in full employment case, wont increase total production/ income/ employment further ; as the economy is already at full employment & can't increase economic activity beyond that.