Use the following to answer questions: Figure: An Increase in Aggregate Demand -(Figure: An Increase in Aggregate Demand) Refer to Figure: An Increase in Aggregate Demand. Assume that the economy is initially in long-run equilibrium at Y_P and P₁. Now suppose that there is an increase in the level of government purchases at each price level. This will: A) shift the aggregate demand curve from AD₂ to AD₁. B) shift the aggregate demand curve from AD₁ to AD₂. C) lead to increased output and a decrease in the price level. D) lead to decreased output and a decreased price level.

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An increase in government purchases will shift the aggregate demand curve to the right from AD₁ to AD₂. This will cause an increase in both output and the price level, as the economy moves from point A to point B.

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