The graph shown displays various economic outcomes. If the economy is currently at equilibrium B, and the government increases its spending:

Question

The graph shown displays various economic outcomes.  If the economy is currently at equilibrium B, and the government increases its spending:

Quizplus · Accepted Answer

According to the graph, an increase in government spending would shift the aggregate demand curve to the right, from AD1 to AD2. This would result in a higher level of equilibrium output (GDP) at E2 compared to E1. Therefore, choice A is correct. Deflation (a decrease in the general price level) is not a likely outcome of an increase in government spending, so choice B is incorrect. Also, since the increase in aggregate demand leads to a higher level of output, it is unlikely that unemployment would increase, so choice C is incorrect.

The Graph Shown Displays Various Economic Outcomes