The figure given below shows the macroeconomic equilibria of a country.
Figure 11.1

-Refer to Figure 11.1. If the economy is in equilibrium at point C, then, other things equal, an increase in government spending will:
A) decrease the price level.
B) lower real GDP and leave the price level unchanged.
C) lower real GDP and increase the price level.
D) increase the price level and leave real GDP unchanged.
E) have no effect on real GDP or the price level.

Question

The figure given below shows the macroeconomic equilibria of a country.
Figure 11.1
 
-Refer to Figure 11.1. If the economy is in equilibrium at point C, then, other things equal, an increase in government spending will:
A) decrease the price level. 
B) lower real GDP and leave the price level unchanged. 
C) lower real GDP and increase the price level. 
D) increase the price level and leave real GDP unchanged. 
E) have no effect on real GDP or the price level.

Quizplus · Accepted Answer

An increase in government spending shifts the aggregate demand curve to the right, which typically increases the price level while leaving real GDP unchanged if the economy is already at full employment (point C).

The Figure Given Below Shows the Macroeconomic Equilibria of a Country