The figure below shows the aggregate demand curve along with both the long-run and the short-run aggregate supply curves in an economy. The economy can move from point E₀ to E₁ through:Figure 14-1 A)a decrease in taxes and an increase in government purchases, other things constant. B)an increase in taxes and government purchases, other things constant C)a decrease in taxes and government purchases, other things constant. D)an increase in taxes and a decrease in government purchases, other things constant. E)an increase in taxes and an increase in the discount rate, other things constant.

Question

Quizplus · Accepted Answer

The movement from point E₀ to E₁ shows an increase in aggregate demand. With other things constant, an increase in government purchases and a decrease in taxes will shift the aggregate demand curve to the right. This increase in government purchases will increase output and cause a short-run increase in the price level. In the long-run, wages and prices adjust, and the economy moves to a new equilibrium point with a higher price level but the same level of output. This is consistent with the shift from point E₀ to E₁ on the diagram.

The Figure Below Shows the Aggregate Demand Curve Along with Both