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.
A) smaller; larger
B) smaller; smaller
C) larger; larger
D) larger; smaller

Question

Quizplus · Accepted Answer

When the government increases its expenditures, the AD curve shifts to the right. If the SAS curve is steeper, there will be more inflationary pressure resulting in a larger increase in the price level. However, the increase in real GDP will be smaller because the economy will reach its full capacity more quickly, leading to diminishing returns. Therefore, the answer is (D) larger; smaller.

The Government Increases Its Expenditures