Figure: AS/AD Adjustment `
Beginning at Point W in the figure, suppose the government engages in a large increase in government expenditure. If workers react by displaying intertemporal substitution and enter the workforce, the economy should move to Point _____ in the short run.
A) V
B) X
C) Y
D) Z

Question

Figure: AS/AD Adjustment  `
Beginning at Point W in the figure, suppose the government engages in a large increase in government expenditure. If workers react by displaying intertemporal substitution and enter the workforce, the economy should move to Point _____ in the short run.
A) V 
B) X 
C) Y 
D) Z

Quizplus · Accepted Answer

An increase in government expenditure leads to a shift in the AD (aggregate demand) curve to the right. Starting at Point W, the initial equilibrium output level is Y1 and the price level is P1.

In the short run, the economy moves along the AS (aggregate supply) curve to a new equilibrium point where the AD and AS curves intersect. However, this movement can be different based on worker behavior, including intertemporal substitution.

If workers enter the workforce due to the increased demand for goods and services, this can increase the supply of labor, shifting the AS curve to the right. This would result in a new equilibrium point at a higher output level and a lower price level.

Point Y corresponds to a higher output level and a lower price level than Point W, which is consistent with this scenario. Therefore, the correct answer is C (Y).