If government purchases increases, what happens to GDP? Assume there are no other changes A. Real GDP decreases, but GDP per capita increases. B. Real GDP Decreases because government spending is always wasteful C. Real GDP Increases but then decreases due to efficiency loss D. Real GDP increases

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Alfredo Ross

Business

24 November, 13:11

If government purchases increases, what happens to GDP? Assume there are no other changes A. Real GDP decreases, but GDP per capita increases. B. Real GDP Decreases because government spending is always wasteful C. Real GDP Increases but then decreases due to efficiency loss D. Real GDP increases

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Kelsie Carpenter · Answer 1

Answer: B. Real GDP Decreases because government spending is always wasteful

Assuming that there are no other changes, real GDP decreases because government spending is always wasteful.

Government purchases or spending includes all government consumption, investment, and transfer payments either financed by the government, borrowed but mostly from taxes.

Since taxes finance government spending, increase in government spending or purchases, will lead to an increase in tax on citizens. If there will be an increase in tax, there will be a decrease in private spending and investment, which will result in lower GDP.