FIGURE 24-1 Refer to Figure 24-1.If the economy is currently producing output of Y₀ and the government initiates an expansionary fiscal policy adequate to close the output gap,the result is intended to be A)the vertical line at Y^* will shift to the left,intersecting the AS and AD curves at Y₀. B)no change in either price level or output,since expansionary fiscal policy is ineffective. C)that the AS curve will shift to the right until point A is reached. D)that the AS curve and the AD curve will shift left simultaneously. E)that the AD curve will shift to the right until point B is reached.

Question

Quizplus · Accepted Answer

With expansionary fiscal policy, government spending increases and/or taxes decrease, which leads to an increase in aggregate demand (AD). This shift in AD causes output to increase and the economy to move closer to potential output (YS). Therefore, the AD curve will shift to the right until it intersects with the AS curve at point B, resulting in an increase in both output and price level. Therefore, the correct choice is E.