FIGURE 23-1 Refer to Figure 23-1.Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point V.The price level is P₀.Now,suppose the AE curve shifts to AE² and we move to a new equilibrium level of GDP at Y₂ and point E on AD².A possible cause of this change in equilibrium is A)an increase in government purchases. B)an increase in the net tax rate. C)a decrease in desired investment. D)a decrease in desired net exports. E)an exogenous fall in the price level.

Question

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The shift in the AE curve to the right indicates an increase in aggregate expenditure at each level of GDP. This could be caused by an increase in government purchases, which would increase aggregate demand and shift the AE curve to the right. This leads to a new equilibrium level of GDP at Y₂ and point E on AD². The other options do not necessarily result in a shift to a new equilibrium level of GDP in the same direction.