Question

if congress and the president want to keep real gdp at its potential level in 2027, they should use an expansionary fiscal policy which would mean increasing government spending or cutting taxes
if congress and the president are successful in keeping real gdp at its potential level in 2027, state whether each of the following will be higher, lower, or the same as it would have been if they had taken no action.
real gdp will be
potential real gdp will be
the inflation rate will be
the unemployment rate will be

Explanation:

1. Real GDP: The goal is to keep real GDP at potential. Without action, real GDP would be below potential (since expansionary policy is needed). With successful policy, real GDP is at potential, so it's higher than if no action (where it would be lower than potential).
2. Potential real GDP: Potential GDP is determined by long - run factors (like technology, labor force, capital stock) and is not affected by short - run fiscal policy. So it remains the same.
3. Inflation rate: Expansionary fiscal policy (increasing spending/cutting taxes) increases aggregate demand. If real GDP is kept at potential (so aggregate demand meets aggregate supply at potential output), without action, aggregate demand would be lower, leading to lower inflation. With policy, inflation is higher than the no - action case.
4. Unemployment rate: At potential GDP, the unemployment rate is the natural rate of unemployment. Without action, real GDP is below potential, so unemployment is above the natural rate. With successful policy, unemployment is at the natural rate, so it's lower than the no - action case.

Answer:

• Real GDP will be: higher
• Potential real GDP will be: the same
• The inflation rate will be: higher
• The unemployment rate will be: lower