Use the following to answer questions: -(Figure: Fiscal Policy II) Refer to Figure: Fiscal Policy II. Suppose that this economy is in equilibrium at E₁. If there is a decrease in government transfers, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP. A) AD_2; left; increase; decrease B) AD_2; left; decrease; decrease C) AD_1; right; increase; increase D) AD_1; left; decrease; decrease

Question

Quizplus · Accepted Answer

A decrease in government transfers will cause a decrease in consumption, which will shift the aggregate demand curve (ADS1U1B11) to the left. This will result in a decrease in both the price level and real GDP, as shown by the movement from point B on the original aggregate supply curve (S1U1B0) to point B1 on the new aggregate supply curve (S1U1B1) in the figure.

Use the Following to Answer Questions