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 an increase in government purchases, _____ 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; right; decrease; increase

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An increase in government purchases will shift the aggregate demand curve to the right (ADS1U1B11 to ADS1U1B12), causing an increase in both the price level and real GDP (movement from point B0 to B11). The equilibrium point will shift to the right (from point E1 to E2), and the new equilibrium will have a higher price level (P2) and higher real GDP (Y2) compared to the initial equilibrium (P1 and Y1).

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