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Figure: Policy Alternatives
-(Figure: Policy Alternatives) Refer to Figure: Policy Alternatives. If the economy is in equilibrium at Y₁ in panel (a) and government spending increases, the result will likely be:

Question

Use the following to answer questions:
Figure: Policy Alternatives

-(Figure: Policy Alternatives) Refer to Figure: Policy Alternatives. If the economy is in equilibrium at Y₁ in panel (a) and government spending increases, the result will likely be:

Quizplus · Accepted Answer

In panel (a), the economy is already producing at its potential output level (YS1) but with an inflation rate of (B11S1U1B0). An increase in government spending would shift the aggregate demand curve to the right, causing an increase in both output and prices. As a result, inflation would likely increase, and there would be no change in unemployment or interest rates.

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