Use the following to answer questions: -(Figure: Fiscal Policy I) Refer to Figure: Fiscal Policy I. Suppose that this economy is in equilibrium at E₂. If there is an increase in government transfers_____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP. A) AD_2; right; increase; increase B) AD_2; left; decrease; decrease C) AD₁; right; increase; increase D) AD₁; right; decrease; increase

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An increase in government transfers increases disposable income, leading to higher consumer spending. This shifts the aggregate demand curve (AD) to the right, resulting in an increase in both the price level and real GDP.

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