Figure 9.1 -Refer to Figure 9.1. A reduction in government spending causes: A) the aggregate demand curve to shift from AD₁to AD₂. B) the economy to move from Point A to Point B, but will not shift the aggregate demand curve. C) the aggregate demand curve to shift from AD₁to AD₀. D) neither a shift of the aggregate demand curve nor a change in real GDP.

Question

Quizplus · Accepted Answer

A reduction in government spending would decrease government expenditures, leading to a decrease in aggregate demand, resulting in a leftward shift of the aggregate demand curve from AD₁ to AD₀. This shift would lead to a decrease in both real GDP and the price level, moving the economy from Point A to Point B on the AD-AS diagram. Therefore, choice C is correct.

Figure 9.1 -Refer to Figure 9.1. a Reduction in Government Spending Causes