Refer to the accompanying figure. Starting from long-run equilibrium at point C, an increase in government spending that increases aggregate demand from AD to AD¹ will lead to a short-run equilibrium at point ________ creating ________ gap.
A)D; an expansionary
B)B; expansionary
C)A; a recessionary
D)B; no output

Question

Refer to the accompanying figure.  Starting from long-run equilibrium at point C, an increase in government spending that increases aggregate demand from AD to AD¹ will lead to a short-run equilibrium at point ________ creating ________ gap.
A)D; an expansionary 
B)B; expansionary 
C)A; a recessionary 
D)B; no output

Quizplus · Accepted Answer

An increase in government purchases is an example of an exogenous increase in spending, which shifts aggregate demand right. A new short-run equilibrium will exist at point D where the economy is experiencing an expansionary gap.

Refer to the Accompanying Figure