Exhibit 16A-2 Macro AD/AS Models In Panel (a) of Exhibit 16A-2, the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂. If the federal government or Fed decides to intervene, it would most likely: A) increase taxes. B) decrease the money supply. C) increase the level of government spending for goods and services. D) decrease the level of government spending for goods and services.

Question

Quizplus · Accepted Answer

In order to shift the aggregate demand curve to the right from AD1 to AD2, the government or Fed would need to increase the level of government spending for goods and services. This would lead to an increase in real GDP from YS1 to YS2 and an increase in the price level from PS1 to PS2. Decreasing taxes or increasing the money supply would also likely have a similar effect of stimulating aggregate demand, but increasing government spending is the most direct and targeted intervention. Decreasing government spending or doing nothing would leave the economy in short-run equilibrium at YS1U1B1 and PS1U1B2.

​ ​ Exhibit 16A-2 Macro AD/AS Models

Exhibit 16A-2 Macro AD/AS Models