Use the following to answer questions: -(Figure: Fiscal Policy II) Refer to Figure: Fiscal Policy II. 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) AD_1; right; increase; increase D) AD_1; left; decrease; decrease

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An increase in government transfers increases consumers' disposable income, leading to higher consumption. This shifts the aggregate demand (AD) curve to the right, resulting in higher price levels and increased real GDP.

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