Use the following to answer questions . Exhibit: Using the Aggregate Demand/Aggregate Supply Model 1 -(Exhibit: Using the Aggregate Demand/Aggregate Supply Model 1) 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.

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An increase in government purchases shifts the aggregate demand curve to the right, leading to a short-run equilibrium with an inflationary gap, where actual output exceeds potential output.

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