Figure 5-2

In Figure 5-2, an increase in government spending would cause
A) an outward shift in the aggregate supply curve and an increase in the price level.
B) an outward shift in the aggregate demand curve and an increase in the price level.
C) an inward shift of the aggregate demand curve and an increase in the price level.
D) an inward shift of the aggregate demand curve and a decrease in the price level.

Question

Figure 5-2

In Figure 5-2, an increase in government spending would cause
A) an outward shift in the aggregate supply curve and an increase in the price level. 
B) an outward shift in the aggregate demand curve and an increase in the price level. 
C) an inward shift of the aggregate demand curve and an increase in the price level. 
D) an inward shift of the aggregate demand curve and a decrease in the price level.

Quizplus · Accepted Answer

An increase in government spending would increase the aggregate demand in the economy, leading to an outward shift of the aggregate demand curve. This would result in an increase in the price level, as shown in Figure 5-2. Option A is incorrect because an increase in government spending would not affect the aggregate supply curve. Options C and D are incorrect because they describe inward shifts of the aggregate demand curve, which is not what would happen with an increase in government spending.

Figure 5-2 In Figure 5-2, an Increase in Government Spending Would Cause