Effects of Anticipated Government Demand-Stimulus Policy on Equilibrium at Full Employment

Short-Term Effects of Anticipated Government Demand-Stimulus Policy

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Question

An economy is currently in equilibrium at full employment. If there is an anticipated governmental demand-stimulus policy and people correctly anticipate the effects, which of the following effects can be seen in the short run?

I. The demand curve moves to the right.

II. Real GDP increases.

III. Prices increase.

IV. The supply curve shifts to the left.

Answers

Explanations

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A. B. C. D.

B

If the buyers and sellers in the resource market completely anticipate the effects of an increase in demand, then they will correctly forecast the higher future inflation. This will prompt buyers to try and buy the goods today, at lower prices. On the other hand, suppliers would prefer to sell in the future, at higher prices.

Thence, the demand curve will quickly move to the right and the supply curve will move tothe left. An equilibrium will be reached at a higher price which leaves the real quantities unaffected, changing only the nominal variables.

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