If government purchases increase, what happens to GDP? Assume there is no other changes A. Real GDP increases, 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 in

Answer : A. Real GDP increases, but GDP per Capita increases.

The GDP of a country is measured by

GDP = C + I + G + (X-M)

Where

C = Consumption Expenditure

I = investment Expenditure

G = Government Spending

X = Exports

M = Imports

When government spending increases on account of purchases of good and services by the government, it increases the demand for goods and services. This increases the aggregate demand.

Given that quantitatively aggregate demand is equal to real GDP, an increase in aggregate demand will result in an increase in Real GDP, if all other things remain the same.

An increase in real GDP will, in turn, result in an increase in per capita income.