What happens to real GDP if the government deficit spending is increased, but the Federal Reserve doesn't expand the money supply? Would the effect on real GDP be the same as if the Federal Reserve had expanded the money supply?
The possible answers are
that real GDP would expand just as much as if the Fed had expanded the money supply
that real GDP would decrease because the Fed didn't expand the money supply
- that real GDP would expand, but not as much as if the Fed had expanded the money supply
- interest rates would decrease
- that real GDP would expand by more than it would have if the Fed had expanded the money supply.
I've tried just Googling the question and checking my textbook, but there doesn't seem to be anything that I found on it. I've tried thinking about it with an AD/AS model, where I figured that the AD curve would shift right, but I thought AS would catch up to it and money would just deflate, so real GDP would stay the same. However, that's not an option for the question so I'm sure I messed up somehow.
Just by process of elimination, I'm not sure about the first three, but I'm pretty sure the fourth and fifth don't make sense. Besides that, I honestly have no clue.