An increase in G or G' shifts the output supply curve to the right because
A) lifetime wealth increases, a positive income effect that shifts labour supply to the right.
B) lifetime wealth decreases, a negative income effect that shifts labour supply to the left.
C) lifetime wealth decreases, a negative income effect that shifts labour supply to the right.
D) the increase in the real interest rate shifts output supply.
E) the decrease in the real interest rate shifts output supply.

Question

Quizplus · Accepted Answer

An increase in government spending (G) or future government spending (G') reduces lifetime wealth, causing a negative income effect that encourages individuals to supply more labor, shifting the labor supply curve to the right and thus shifting the output supply curve to the right.

An Increase in G or G' Shifts the Output Supply