-The figure above illustrates the aggregate demand, short-run aggregate supply, and long-run aggregate supply in Lotus Land. The economy is currently at point D and the government decreases its taxes. The economy will move to ________. The price level will ________, and the change in real GDP will be ________ the increase in aggregate demand.
A) point A; fall; less than
B) point D; rise; less than
C) point C; rise; less than
D) point B; remain constant; the same as

Question

-The figure above illustrates the aggregate demand, short-run aggregate supply, and long-run aggregate supply in Lotus Land. The economy is currently at point D and the government decreases its taxes. The economy will move to ________. The price level will ________, and the change in real GDP will be ________ the increase in aggregate demand.
A) point A; fall; less than 
B) point D; rise; less than 
C) point C; rise; less than 
D) point B; remain constant; the same as

Quizplus · Accepted Answer

The decrease in taxes will increase disposable income, leading to an increase in consumption and aggregate demand. This shifts the aggregate demand curve to the right, moving the economy from point D to point C. As a result, the price level will rise, and the change in real GDP will be less than the increase in aggregate demand due to the upward sloping nature of the short-run aggregate supply curve.

-The Figure Above Illustrates the Aggregate Demand, Short-Run Aggregate Supply