Refer to the information provided in Figure 11.8 below to answer the questions that follow. Figure 11.8
-Refer to Figure 11.8. Suppose the economy is currently at Point A producing potential output Y₀. If the government increases spending, the economy moves to Point ________ in the short-run and to Point ________ in the long-run.

Question

Refer to the information provided in Figure 11.8 below to answer the questions that follow.

Figure 11.8
-Refer to Figure 11.8. Suppose the economy is currently at Point A producing potential output Y₀. If the government increases spending, the economy moves to Point ________ in the short-run and to Point ________ in the long-run.

Quizplus · Accepted Answer

In the short run, an increase in government spending shifts the aggregate demand curve to the right, moving the economy to a higher output level, which is represented by moving from Point A to Point B. In the long run, to counteract inflationary pressures and return the economy to its potential output, adjustments occur that move the economy to Point C, where it is back at its potential output but at a higher price level.

Refer to the Information Provided in Figure 11