Figure 7-6 -Refer to Figure 7-6. 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.

Question

Quizplus · Accepted Answer

An increase in government purchases leads to an increase in aggregate demand. In the short-run, this results in an increase in both price level and real GDP. The economy moves from point A to point S1U1B0 initially. The new equilibrium is at the intersection of the SRAS and AD1 curves, which is point S1U1B1b. The price level rises to PS1U1B1b and real GDP increases to YS1U1B1b.

Figure 7-6 -Refer to Figure 7-6. Suppose the Economy Is Initially at Is