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 an increase in government purchases shifts the aggregate demand curve to AD₂. What happens in the new short run? A) Firms increase output because product prices rise while real wage falls. B) Firms increase output because product prices and real wage rise. C) Firms will have to pay higher nominal wages and employ more workers to supply the increased output. D) The price level increases to P_b, real wages, nominal wages, and employment increase.

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In the short run, an increase in government purchases shifts the aggregate demand curve to the right, leading to higher product prices. Firms increase output because the real wage falls as nominal wages are sticky, making labor relatively cheaper.

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