Use the following to answer questions: -(Figure: Fiscal Policy I) Refer to Figure: Fiscal Policy I. Suppose that this economy is in equilibrium at E₁. If there is an increase in government purchases, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP. A) AD_2; left; increase; decrease B) AD_2; left; decrease; decrease C) AD_1; right; increase; increase D) AD_1; right; decrease; increase

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Quizplus · Accepted Answer

An increase in government purchases would increase aggregate demand (AD), shifting the AD curve to the right from AD to AD1. This would cause an increase in both the price level and real GDP, as the economy moves from point B0 to point B1 along the SAS curve. Therefore, the correct answer is choice C.

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