Refer to the graph. Assume that the economy is initially at full-employment equilibrium at point A. If there is cost-push in?ation in this economy and the government pursues an expansionary ?scal
Policy, then in the long run the
A) price level will rise from $P _ { 1 } \text { to } P _ { 2 } \text { and real output will be } Q _ { 2 } \text {. }$
B) price level will rise from $P _ { 1 } \text { to } P _ { 3 } \text { and real output will be } Q _ { 1 } \text {. }$
C) price level will rise from $P _ { 1 } \text { to } P _ { 2 } \text { and real output will be } Q _ { 3 } \text {. }$
D) price level will be $P _ { 1 } \text { and real output will be } Q _ { 1 } \text {. }$

Question

Refer to the graph. Assume that the economy is initially at full-employment equilibrium at point A. If there is cost-push in?ation in this economy and the government pursues an expansionary ?scal
Policy, then in the long run the
A) price level will rise from $P _ { 1 } \text { to } P _ { 2 } \text { and real output will be } Q _ { 2 } \text {. }$ 
B) price level will rise from $P _ { 1 } \text { to } P _ { 3 } \text { and real output will be } Q _ { 1 } \text {. }$ 
C) price level will rise from $P _ { 1 } \text { to } P _ { 2 } \text { and real output will be } Q _ { 3 } \text {. }$ 
D) price level will be $P _ { 1 } \text { and real output will be } Q _ { 1 } \text {. }$

Quizplus · Accepted Answer

With cost-push inflation, there is a decrease in aggregate supply, leading to a higher price level and lower real output. An expansionary fiscal policy would increase aggregate demand, pushing the economy to point B in the short run. However, in the long run, there would be upward pressure on wages and other input costs due to the decrease in aggregate supply. This would shift the short-run aggregate supply curve to the left, leading to a new equilibrium at point C with a higher price level and the same level of real output as before the expansionary fiscal policy. Therefore, the price level will rise from P1 to P3 and real output will be Q1.

Refer to the Graph P1 to P2 and real output will be Q2. P _ { 1 } \text { to } P _ { 2 } \text { and real output will be } Q _ { 2 } \text {. }P1​ to P2​ and real output will be Q2​.

Refer to the Graph $P _ { 1 } \text { to } P _ { 2 } \text { and real output will be } Q _ { 2 } \text {. }$