Questions: Which of the following is true when the government attempts to move the economy to full employment by increasing spending? Multiple Choice The government must initially spend more than the GDP gap if the aggregate supply curve is upward sloping. The total change in spending includes both the new government spending and the subsequent increases in consumer spending. The desired stimulus should be set by the multiplier divided by the AD shortfall.

The answer is: The total change in spending includes both the new government spending and the subsequent increases in consumer spending.

This statement is not necessarily true. The amount the government needs to spend to close the GDP gap depends on the size of the multiplier and the responsiveness of aggregate supply. If the aggregate supply curve is upward sloping, it means that prices will rise as output increases, but this does not directly imply that the government must spend more than the GDP gap.

This statement is true. When the government increases spending, it sets off a chain reaction of increased income and consumption. This is known as the multiplier effect. The initial government spending leads to increased income for those who receive the spending, who then spend a portion of that income, leading to further increases in income and spending throughout the economy.

This statement is incorrect. The desired stimulus is typically calculated by multiplying the AD shortfall by the multiplier, not dividing it. The multiplier effect shows how much total spending will increase as a result of an initial increase in spending.