Using Figure 2 above, suppose that the economy started at PAE2. A potential change that could cause the economy to go from PAE2 to PAE1 might be:
A) consumption increases.
B) investment increases.
C) export increase.
D) government spending decreases.

Question

Using Figure 2 above, suppose that the economy started at PAE2. A potential change that could cause the economy to go from PAE2 to PAE1 might be:
A) consumption increases. 
B) investment increases. 
C) export increase. 
D) government spending decreases.

Quizplus · Accepted Answer

A decrease in government spending would shift the AD to the left, resulting in a decrease in real GDP and inflation. This change would cause the economy to move from PAE2 to PAE1.

Using Figure 2 Above, Suppose That the Economy Started at PAE2