Exhibit 25-1
-Suppose the economy is initially at point A in Exhibit 25-1. If government purchases increase, which point best depicts where the economy will be in the medium run as a result of the change in spending?
A)F
B)D
C)B
D)E

Question

Exhibit 25-1 
-Suppose the economy is initially at point A in Exhibit 25-1. If government purchases increase, which point best depicts where the economy will be in the medium run as a result of the change in spending?
A)F 
B)D 
C)B 
D)E

Quizplus · Accepted Answer

An increase in government purchases initially boosts aggregate demand, moving the economy to a higher output and price level in the short run (point B). In the medium run, as prices adjust, the economy moves back to its potential output but at a higher price level, maintaining the position at point B.

Exhibit 25-1 -Suppose the Economy Is Initially at Point a in Exhibit