The diagram below is for a closed economy which begins in long- run equilibrium at Y*.
FIGURE 32- 3
-Refer to Figure 32- 3. Suppose the government implements an expansionary fiscal policy which increases the budget deficit. The initial effect of this policy is the opening of a(n) gap, and a new short- run equilibrium with a price level of and real GDP of .

Question

The diagram below is for a closed economy which begins in long- run equilibrium at Y*.
  FIGURE 32- 3
-Refer to Figure 32- 3. Suppose the government implements an expansionary fiscal policy which increases the budget deficit. The initial effect of this policy is the opening of a(n) gap, and a new short- run equilibrium with a price level of and real GDP of .

Quizplus · Accepted Answer

An expansionary fiscal policy increases aggregate demand, leading to an inflationary gap, higher price level (P₁), and increased real GDP (Y₁).

The Diagram Below Is for a Closed Economy Which Begins