Use the following to answer questions . Exhibit: Using the Aggregate Demand/Aggregate Supply Model 1 -(Exhibit: Using the Aggregate Demand/Aggregate Supply Model 1) Suppose the economy is initially at point A. Now suppose that there is an increase in government purchases. In the short-run, A) the price level rises to P_b and real GDP increases to Y_b. B) the price level rises to P_d. C) the aggregate supply curve shifts up to SRAS₂. D) the economy's potential output increases to Y_b.

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Quizplus · Accepted Answer

When there is an increase in government purchases, it will shift the aggregate demand curve to the right, leading to an increase in both the price level and real GDP in the short run. Therefore, the correct choice is A, which shows the new intersection of the AD and SRAS curves at a higher price level and higher real GDP. B is incorrect because it only shows the new price level but does not consider the impact on real GDP. C is incorrect because shifting the SRAS curve up would only lead to a higher price level without necessarily increasing output. D is incorrect because potential output is determined by long-run factors such as technology, capital stock, and labor force, which are not affected by a short-run increase in government purchases.

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