Impact of Fiscal Policies on GDP in a Full Employment Economy

Very Hard Macroeconomics Gdp And Growth

In an economy characterized by rapid growth, the government implements a series of fiscal policies aimed at stimulating demand, which in turn affects GDP. Assume that this economy is initially at full employment, and the fiscal policies include significant increases in government spending and tax cuts across various sectors.

Given this scenario, which of the following impacts of these fiscal measures on the economy is most likely to occur?

The potential GDP will increase immediately as a direct result of government spending.

The economy will experience demand-pull inflation, leading to an increase in current GDP, but the long-term potential GDP remains unchanged.

The fiscal policies will reduce the budget deficit significantly, thus allowing for greater investments in public infrastructure with immediate effects on GDP.

Hint

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