The government increases its expenditures. The steeper the SAS curve, the will be the increase in the price level and the will be the increase in real GDP.

Question

Quizplus · Accepted Answer

When the government increases its expenditures, it leads to an increase in aggregate demand (AD) which causes the price level to rise. The steeper the SAS curve, the more sensitive it is to changes in price level, which means a larger increase in price level for the same increase in AD. However, since the SAS curve is steeper, it also means that there is less room for real GDP to increase in response to the increase in AD. Hence, the increase in real GDP will be smaller. Therefore, the correct choice is A.

The Government Increases Its Expenditures