Use the figure below to answer the following question(s). Figure 12-2
Refer to Figure 12-2. If an economy is operating in the short run at point a, Keynesian analysis indicates that expansionary fiscal policy will
A) increase AD and move the economy toward point b.
B) increase AD and move the economy toward point c.
C) increase SRAS and move the economy toward point b.
D) decrease SRAS and move the economy toward point c.

Question

Use the figure below to answer the following question(s). Figure 12-2
 Refer to Figure 12-2. If an economy is operating in the short run at point a, Keynesian analysis indicates that expansionary fiscal policy will
A) increase AD and move the economy toward point b. 
B) increase AD and move the economy toward point c. 
C) increase SRAS and move the economy toward point b. 
D) decrease SRAS and move the economy toward point c.

Quizplus · Accepted Answer

According to Keynesian analysis, if an economy is operating below potential output (as indicated by point a), expansionary fiscal policy, such as an increase in government spending or a decrease in taxes, will increase aggregate demand (AD) and shift it to the right, causing the economy to move towards potential output (point b).

Use the Figure Below to Answer the Following Question(s)