Figure 7-6 -Refer to Figure 7-6. Suppose the economy is initially at point A. Now suppose an increase in government purchases shifts the aggregate demand curve to AD₂. As a result, A) the economy is not in equilibrium because it operates with an output gap. B) the economy is in short-run equilibrium and it operates with an inflationary gap. C) the economy is in short-run equilibrium and it operates with a recessionary gap. D) the economy is not in equilibrium because the unemployment rate is not equal to the natural rate of unemployment.

Question

Quizplus · Accepted Answer

An increase in government purchases shifts the aggregate demand curve to the right, leading to a higher level of output and price level, resulting in a short-run equilibrium with an inflationary gap.

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